Karnataka seeks bigger share of central taxes, Rs 1.15 trn for B'luru infra

Business Standard

13-06-2025

Karnataka Chief Minister Siddaramaiah on Friday met 16th Finance Commission Chairman Arvind Panagariya, demanding a larger allocation for the state from the central tax pool and Rs 1.15 lakh crore investment to strengthen Bengaluru's infrastructure for the five-year period beginning April 1, 2026.
In the meeting, which lasted for more than an hour, Siddaramaiah flagged that there has been a "stark imbalance in fiscal returns" despite Karnataka contributing nearly 8.7 per cent of the national GDP with just 5 per cent of the population and ranking second in the country in GST collections.
"The imbalance in fiscal returns is so much that for every rupee Karnataka contributes to union taxes, it receives only 15 paise in return," the CM told reporters after the meeting.
Speaking about the discussion, Siddaramaiah said: "The meeting was very cordial and the chairman was very receptive to our demands... We have told them that the tax devolution to states should be done fairly and rationally." The CM pointed out that the reduction in Karnataka's share under the 15th Finance Commission -- from 4.71 per cent to 3.64 per cent -- resulted in a cumulative loss of over Rs 80,000 crore during the award period.
Karnataka's per capita devolution has also dropped significantly from 95 per cent to 73 per cent of the national average between 14th and 15th Finance Commissions, despite increased GDP contribution.
Siddaramaiah called for "critical reforms" to make the fiscal devolution system more growth-oriented, predictable and fair, while highlighting three main concerns: the growing disparities in per capita devolution; the flawed design of revenue deficit grants; and the unpredictable nature of state-specific grants.
In the memorandum submitted to the Commission, Karnataka demanded that the share of taxes devolved to states be increased to at least 50 per cent, and that cess and surcharges be capped at 5 per cent. The state also recommended including union non-tax revenues in the divisible pool.
"The Centre collects cess and surcharge on various commodities. We don't have a share in it. If they collect more than 5 per cent it should come under the divisible pool," Siddaramaiah said.
For sharing funds among states, the chief minister suggested that each state retain about 60 per cent of what it contributes, with 40 per cent going to less-developed states ensuring both growth and equity.
To make the formula fairer, Karnataka has proposed reducing the weight of the income-distance criterion by 20 per cent and reallocating the same to reflect state's fiscal contribution as measured by the share in national GDP, so that high-performing states are not penalised but encouraged.
Siddaramaiah also questioned the effectiveness of revenue deficit grants. "About Rs 38,000 crore revenue deficit grant was given to Kerala, but not to Karnataka. Similarly, a special grant of Rs 5,495 crore was recommended for Karnataka by 15th Finance Commission but Government of India refused to give it to us," he said.
As a result, the state government has recommended replacing "discretionary" special grants with a formula-based allocation of 0.3 per cent of Gross Union Receipts. However, the state has requested grants for Bengaluru development and other critical projects if the Commission continues with such provisions.
"Karnataka's fiscal strength fuels national growth. It is time to ensure that growth is not penalised but rewarded. We urge the commission to adopt a balanced, forward-looking approach to devolution," Siddaramaiah said.
The overall share allocated to all states from central taxes was reduced to 41 per cent for 2021-26, as against 42 per cent in the previous cycle, primarily due to the creation of Union Territories of Jammu and Kashmir and Ladakh.
Siddarmaiah was accompanied by Economic Advisor to CM Basavaraya Reddy, Chief Secretary Shalini Rajneesh, Principal Secretary of Finance Ritesh Singh, and other state officials.
The 16th Finance Commission, established in December 2023, is tasked with recommending tax revenue distribution between the central government and states for 2026-31. The commission must submit its recommendations by October 31, 2025.