Paisa vasool? Decoding unfairness in Union’s tax devolution to south states

For every rupee that Karnataka paid as tax to the Union government in 2022-23, the state received just 11 paise from the central divisible pool. Bihar, on the other hand, received Rs 5.9 per rupee, and Uttar Pradesh Rs 1.72. The disgruntlement about the favouring of northern states over those in south India has become louder ever since Union Finance Minister Nirmala Sitharaman released the interim budget for 2024-25. 

TNM analysed states’ contributions to the central taxes and their share of the divisible pool over the past few years to find out the rate of returns that five south Indian states and a few north Indian states receive. TNM included Central Goods and Services Tax, Integrated GST, direct taxes, as well as cesses and surcharges in calculating the contributions of the states. Cesses and surcharges, however, do not make it to the divisible pool of central taxes. 

Karnataka, which is among the top contributors to the central taxes, has consistently received considerably lower returns. This is not the case for a state like Uttar Pradesh. 

In the five years between 2018-19 and 2022-23, Karnataka received 20; 18; 12; 14; and 11 paise respectively for each rupee paid to the Union government. The numbers are starkly different for states like Uttar Pradesh and Bihar (as seen in charts below).