//How do the Indian States face tax inequality?

How do the Indian States face tax inequality?

In July 2019 an autonomous body called Institution for Economic Growth(IEG), Delhi drafted a report on a study prepared solely for the aim of evaluation of the 15th Financial Commission. Financial Commission, which is a technocratic body designed under Article 280 of the constitution to resolve disputes between the union and the state government on matters concerning fiscal federalism, i.e, redistribution of taxes from Centre to State, which in a state like India is received from the states and then redistributed back according to few criteria. The report evaluated that the conduct of the Financial Commission was vastly influenced by the union government’s power to right to line the principles with which the formulae of tax redistribution has to follow. The role of the Financial Commission is to calculate which state gets what proportion of money in India and to resolve disputes by accommodating everyone into “One Book”. While the commission is non-partisan and itself isn’t directly answerable to any union government, the latter does have the right to line the principles the commission must follow.

And following the Union Government’s recommendation, the commission which is certain to be acknowledged after a 5 years interval by the President gave their recommendation this year that “Population criteria of revenue generated from buoyant taxes of the centre were to be shared accordingly” which means all the buoyant taxes which are taxes where revenue increases in response to a rise in national income without updating the percentage taxed, like income tax etc. which were mostly collected from the states were to have new criteria of population factoring in the redistribution.

In doing so, Southern and Eastern states were infuriated as this step could significantly reduce their share of revenue because of their steps to empower their women and control their population. Which in turn made them considerably richer. When North India’s interior had human development indicators like that of Sub-Saharan African standards, the southern states maintained human development standards reflecting those of upper-middle-incoming countries. Women in coastal India have fewer children and consequently lower fertility rates. In many southern states, the Fertility Rate is also below the replacement rate; But up north, women may have three or four children on the typical. Even more disruptive is the undeniable fact that the north and south have diverged economically and demographically. The richer south and East resents having to subsidize the rest of the country. States like Tamil Nadu, West Bengal etc get back 30 rupees for every 100 it sends to New Delhi; while the northern state of Bihar receives 219.

Therefore to counter that, the Financial commission was seen to process adjustment and evaluate the existing parameters of distributing these taxes
The major parameters which were evaluated are as follows:-
i) Introduction of new criteria of “Tax Effort” i.e the ratio of the amount of taxes collected and thus the anticipated revenue collection.
ii) Rewarding the state for their usage of contraception by introducing the lowering birthrate of states as a component mentioned as “Demographic Performance”.
iii) Reducing the factor of the population from 27.5% to 15%.

But even after this, it was observed that the southern Indian states of Karnataka, Tamil Nadu, Kerala, Telangana, Andhra Pradesh instead of getting their issues resolved by the government, got their problems worsened. The fact that the Finance Commission’s formulas often indirectly takes into account the factor of the population even in parameters that were meant to be a counterbalance to population.
For example:-
While calculating demographic performance which gets computed by taking the reciprocal of the total fertility ratio of each state, scaled by 1971 population data but the same also multiplies this with the 1971 population.
Secondly, It may be also unclear how the size of the state may be a factor when calculating its performance in “demographic management”.
Similarly, the tax effort criteria also include population indirectly: the 2011 figure. Tax effort, in theory, is supposed to measure, within the commission’s own words, “efficiency of tax collection”, instead of rewarding states with higher tax efficiency rewards the ones with the higher collection. As a result, this formula produces inexplicable results. as an example, Uttar Pradesh scores above Tamil Nadu on “tax effort”. And Bihar beats Kerala on “demographic performance”.

Although it is seen that Regional ethnic differences causing clashes and separatist sentiment but this level of anti-federal and Northern Centric ideal of the BJP and thus the collapse of the congress which had cultivated a unanimity as a Pan-India party rather than BJP- which presents Hind belt hinterland. The difference between these two important parts of India is ever looming and healing these divisions need quite just an economic mic point of view.