The 2024 interim budget, announced by Union Finance Minister Nirmala Sitharaman on February 1, had triggered a row in Karnataka with the Congress-led state government slamming the reduced allocation of funds to the state. Alleging that southern states were getting a raw deal in the distribution of tax revenue, Congress MP and DK Shivakumar’s brother DK Suresh had even warned that if corrective measures aren’t taken, states might be compelled to seek separate nationhood.
Karnataka’s elected Congress representatives are also holding a protest in New Delhi on February 7, against the alleged fiscal injustice perpetrated by the Union government. The protest was announced by state Congress chief and Deputy Chief Minister DK Shivakumar on the afternoon of February 2, with Chief Minister Siddaramaiah also indicating his participation later in the day.
Essentially, Karnataka now aligns with Kerala, Telangana, and Tamil Nadu in contesting the Union government's policies concerning tax devolution and state grants, a significant turn of events considering the 16th Finance Commission is due to submit its report in October 2025. Tax devolution, it may be noted, is the distribution of tax revenues between the Union and state governments.
Meanwhile, in response to DK Suresh’s statements on the budget, Bengaluru software engineer Shivanand Gundanavar and his friends came up with the hashtag #SouthTaxMovement, currently trending on X (Twitter). The ‘movement’ has gained traction across southern states, all echoing grievances about the disproportionate central funding they receive despite their significant contributions to the national Gross Domestic Product (GDP).
What is the crux of the issue?
India follows a federal system, in which fiscal federalism plays a vital role in keeping state-Union relations peaceful. The Constitution of India mandates the Union government to form a specialised Finance Commission to redistribute taxes collected by different levels of government.
While the Union government collects the majority of taxes, states handle most administrative tasks. So there’s a need for a mechanism to divide revenue between these two levels of government. This is known as vertical devolution. Another responsibility of the Finance Commission is horizontal devolution, which determines how the states share the total revenue pie among themselves.
The crux of the current issue raised by the southern states lies in “vertical fiscal imbalance.” Simply put, the Union government collects the lion’s share of taxes, while states shoulder the burden of crucial public services such as healthcare, education, and infrastructure. This perceived disparity in turn exacerbates the “horizontal fiscal imbalance,” which means wealthier states end up subsidising the poorer ones. Karnataka, for instance, contributed a whopping Rs 4.3 lakh crore in taxes but received a mere Rs 50,257 crore in return. But Uttar Pradesh, despite a lower GDP, received almost double that amount (Rs 2,18,816 crore).
Tara Krishnaswamy, co-founder of non-partisan NGO Political Shakti, says this imbalance was worsened with the 15th Finance Commission utilising population as a crucial factor in determining horizontal devolution. “This decision favoured more populous northern states that struggle to implement family planning, while penalising states such as Tamil Nadu and Karnataka with lower fertility rates,” she adds.
In the tax devolution as per the 15th Finance Commission's recommendations, all southern states except Tamil Nadu experienced reductions in their share. CM Siddaramaiah, on February 6, pointed out, “From the 14th to the 15th Finance Commission, Karnataka’s fund allocation has decreased by 1.07%. Over the past four years, Karnataka has faced difficulties due to reduced tax devolutions, resulting in a loss of Rs 45,000 crore.”
Addressing similar allegations in the Lok Sabha, Nirmala Sitharaman cited the established nature of the tax devolution process and stated that she lacked discretion to alter Finance Commission recommendations. But this stands in contrast to the statements made by BVR Subrahmanyam, CEO of NITI Aayog, which suggested behind-the-scenes negotiations by Prime Minister Narendra Modi in 2014 to reduce the funds allocated to states. Recently, Al Jazeera had published a story revealing that PM Modi had held backdoor negotiations with the Finance Commission of India to significantly cut funds allocated to the country’s states.
Impact of GST and call for fiscal autonomy
Experts argue that the introduction of the Goods and Services Tax (GST) in 2017 reduced state taxation autonomy, instead increasing the states’ reliance on the Union government for funds. “Once GST came into effect everything was centralised. Now state governments hardly have any flexibility when it comes to taxation,” said pro-Kannada activist Ganesh Chetan.
Initially hailed as a transformative reform, the GST had promised to streamline administration and increase state revenues. But despite certain improvements, the initial optimism soon waned as states grappled with delayed remittances, inadequate compensation, and the realisation that the 14% guaranteed compensation fell far short of expectations in many states.
Prior to the introduction of GST, taxes were primarily under state control, Tara points out. “But now the Union government is increasingly relying on indirect taxes such as GST,” she adds.
Siddaramaiah recently said that the stoppage of the GST compensation has hurt Karnataka. “Before GST, our state's tax collection growth was at 15%...compensation was discontinued in June 2022. This has significantly impacted our ability to achieve a 15% tax collection growth rate again,” he said.
Ganesh emphasises on the need to empower states in tax-related decision-making to address fiscal autonomy. “The taxation rights of the states is the primary issue here. How can states regain those rights from the Union government? We should ensure the state gets its fair share of resources, that’s what we need to focus on.”
Responding to BJP Member of Parliament (MP) Pratap Simha’s remark that “south India has benefitted from the north,” Ganesh advocates for structural reforms rather than mere political rhetoric to address the imbalance. “Politicians like Pratap Simha or Siddaramaiah give out statements, but what concrete proposals do they offer? Are there any reforms promised at the manifesto level? These are questions that need to be raised. Rather than seeing it as a one-time political blame game, we should look at it as a structural issue that needs to be reformed,” Ganesh says.
Soon after coming to power in May 2023, the Congress government in Karnataka had blamed PM Narendra Modi for the state suffering a loss, as the legitimate special grant of Rs 5,495 crore mentioned in the 15th FC’s interim report was denied to the state. Siddaramaih accused FM Nirmala Sitharaman, a Rajya Sabha MP from Karnataka, of removing the special grant from the final report of 15th FC. He had also written a letter to Nirmala in August 2023 seeking the release of the special grants.
BJP IT cell in-charge Amit Malviya responded to the Congress’ allegations on February 6, claiming that Siddaramaiah's demand for Rs 5,495 crore special grant was a ‘lie’. “The 15th FC did not recommend a special grant to any state. There is no such recommendation to accept or reject. It is a figment of his (Siddaramaiah’s) imagination,” he said.