States' Share In Tax Pool Shrinking Amid Rising Cess, Surcharge: Kerala CM

Kerala Chief Minister Pinarayi Vijayan on Thursday said the cess and surcharge levied by the Centre was showing a 'rising trend' and resulting in the 'shrinkage' of states' share in the divisive pool of taxes.

Vijayan said this during his inaugural address at a conclave of five non-BJP-ruled states organised by Kerala to discuss the key issues related to the 16th Finance Commission.

The conclave, presided over by Kerala Finance Minister K N Balagopal, was attended by top dignitaries, including Telangana Deputy Chief Minister and Finance Minister Mallu Bhatti Vikramarka, Karnataka Revenue Minister Krishna Byre Gowda, Punjab Finance Minister Harpal Singh Cheema, and Tamil Nadu Finance Minister Thangam Thennarasu.

Other notable participants include Leader of Opposition in the State Assembly, V D Satheesan, renowned economist and former economic advisor to the central government Dr Arvind Subramanian, former Kerala Finance Minister T M Thomas Isaac and Vice-Chairman of the Kerala State Planning Board Prof V K Ramachandran.

Addressing the dignitaries, the CM said that the rise in surcharges and cesses, which are not included in the divisive pool, was happening at a time when the Finance Commission has been recommending a higher share for the states from the net proceeds of the taxes collected by the Centre.

He said that the 16th Finance Commission needs to factor in this rising trend in surcharges and cesses, when it recommends the prescribed share of the states from the net proceeds of taxes collected by the union government.

The CM further said that the share of the states in the divisive pool needs to be increased further from the 41% recommended by the last Finance Commission.

He said that Kerala and many other states have made this demand in the past with the southern state suggesting that it be increased to 50%.

"The demand for a higher share for the states in the taxes collected by the Union is having continued relevance and it is my request to the eminent scholars and colleagues who are here to formulate it in a concrete manner. This will help the states to make an effective case before the 16th Finance Commission for raising the share of taxes which are distributed to the states, in view of the widening vertical fiscal imbalances," Vijayan said.

He said the conclave was being held at a time when the country's federal polity was 'facing several challenges and many states have been compelled to take legal course of action to enforce their constitutional rights.

Speaking along similar lines, Balagopal, in his presidential address, said the two main objectives of the conclave were to 'draw the attention of the nation to the worsening imbalances in the fiscal system of the country' and 'have broad based consultation on the state's memorandum to be submitted to the 16th Finance Commission'.

The minister said there were 'vertical and horizontal imbalances' in the fiscal architecture of India and these were worsening over time and 'reached the worst phase with the recommendations of the 15th Finance Commission'.

The system of cooperative federalism in the country is in a bad crisis now. Almost all states, regardless of the political party in power, are suffering from hitherto unprecedented fiscal squeeze.

"The state governments are struggling to fulfil their responsibilities to the people, especially to the most deprived sections of the society," Balagopal said.

He too pointed out that the share of states' in the divisive pool was coming down as the union government was 'cutting it down' by 'mobilising revenue through sources which are not divisible such as cess and surcharges, disinvestment, monetisation of public assets, RBI profits, etc.

The minister also said that the abolition of the planning commission, enactment of the FRBM Act -- which the union has been able to adhere to only in one year since 2003 but was imposed on the states, the introduction of GST in the country, and the Centre’s approach, of late, towards off budget borrowing have 'systematically deprived the fiscal autonomy of states in India'.

He too called for increasing the share of states in the divisive pool to at least 50% and a 5% cap on the cess and surcharges levied by the Centre.

The FM also said that Kerala's gains have become a big liability for the state exchequer and it was being penalised for its achievements.

He also said that the fiscal federal relations in our country are being transformed from 'cooperative federalism' to 'subordinated federalism' or 'coercive federalism'.

The CM, in his inaugural address, also referred to the issue of balancing the tax distribution among states which are performing well and those lagging behind.

Vijayan said that due consideration has to be given to the needs of states which have taken extra efforts to achieve health, education and demographic indicators.

The Marxist veteran also said that states and local bodies should get funds which do not come with conditionalities so that they can discharge their functions properly.