The top five industrial states of India - Maharashtra, Karnataka, Delhi, Tamil Nadu and Gujarat collectively contributed more than 72% of the direct taxes and 53% of Central GST in FY 2023-24, according to data tabled in Parliament on Monday. Meanwhile, less developed states like Uttar Pradesh (UP), Bihar and Madhya Pradesh (MP) received 36% of the tax devolved by the Centre, despite contributing only 5% to the total direct tax and Central GST collections.
Disparity in Tax Contribution and Devolution
Responding to a question in Lok Sabha, Minister of State (MoS) for Finance Pankaj Chaudhary provided a state-wise breakup of direct tax and Central GST collections, along with tax devolution figures from FY20 to FY24.
As per the official data
- The five leading industrial states contributed Rs 14.2 lakh crore out of the ₹19.62 lakh crore collected in corporate and income tax in FY24.
- These states also contributed Rs 2 lakh crore of the Rs 3.75 lakh crore Central GST collected during the same period.
In contrast:
- UP, Bihar, and MP together received Rs 4 lakh crore from the Centre's Rs 11.3 lakh crore divisible tax pool.
- However, their contribution to direct taxes and Central GST stood at a mere 5% of the total collection.
Southern States Seek Fair Tax Distribution
The five southern states - Tamil Nadu, Karnataka, Telangana, Andhra Pradesh, and Kerala contributed 25% of direct taxes and 27% of Central GST but received only 15% of the Centre's divisible tax pool. This disparity has led to growing concerns among southern states, which argue that the current tax-sharing formula penalizes better-performing states while disproportionately benefiting less developed regions.
16th Finance Commission Reviewing Tax Allocation
The Centre allocates 41% of its tax revenue to states based on a formula determined by the Finance Commission. The 16th Finance Commission, chaired by Arvind Panagariya, is currently reviewing the distribution of tax revenue among states and engaging in discussions to address regional imbalances.
As debates over fiscal federalism intensify, industrially advanced states continue to demand a more equitable tax-sharing mechanism, arguing that their higher economic output and tax contributions should be adequately reflected in revenue distribution policies.
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