Southern States Challenge Unequal Tax Distribution

When Karnataka Chief Minister Siddaramaiah landed in Delhi last year, it wasn’t for a routine meeting. He arrived with a mission, and a protest. Flanked by finance officials and party leaders, he led a massive demonstration in the capital, demanding a fairer share of central tax revenues for southern states. The message was loud and clear: the South, which contributes significantly to India’s economy, feels shortchanged in tax devolution.

At the heart of the protest was what the Karnataka government called a “fiscal injustice.” Despite being one of the highest tax-contributing states, Karnataka’s share in central devolution had dropped sharply. Tamil Nadu, Kerala, Andhra Pradesh and Telangana also voiced similar concerns. The numbers tell a striking story. In the Indian Union, the southern states are economic powerhouses, yet they receive proportionally less in central transfers than many northern states.

“This is how taxes work. One would want to give funds to those states that need them the most,” says Alok Prasanna Kumar, co-founder of the Delhi-based Vidhi Centre for Legal Policy, an independent think-tank specialising in legal research to make better laws and improve governance for public good.

The simmering discontent over tax distribution is not just an economic issue; it has now boiled down to a political and constitutional flashpoint. It raises fundamental questions about fairness in India’s federal structure. And with the looming 2026 delimitation exercise, which will redraw parliamentary constituencies based on population, the battle over revenue devolution is taking on even greater urgency.

The South Tax Movement

In the last five years, Karnataka’s share of central tax devolution has dropped from 4.71 per cent under the 14th Finance Commission (2015-20) to 3.64 per cent under the 15th Finance Commission (2020-26), costing the southern state an estimated Rs 62,098 crore. Chief Minister Siddaramaiah, who has repeatedly highlighted this shortfall on social media, called it “fiscal injustice”. The 2024 protest in New Delhi, dubbed the “South Tax Movement”, challenged a system that southern states argue favours northern states with rapidly growing populations.

Kerala’s Finance Minister KN Balagopal, citing RBI data from 2021-23, noted that for every Rs 100 of central tax collected from Kerala, the state received only Rs 21, compared to Rs 46 for Uttar Pradesh and Rs 70 for Bihar. Tamil Nadu’s DMK government has also pointed out that its share of central taxes has fallen from 5.30 per cent under the 12th Finance Commission to 4.07 per cent now.

The Role of Central Transfers and Cesses

A key point of contention is the Union government’s increasing reliance on cesses and surcharges, which are not part of the divisible tax pool. This effectively shrinks the share of central tax revenue available to states. In FY25, the Union government is set to transfer only 35.5 per cent of its divisible tax pool to states, down from the recommended 41 per cent. Over the past four years, this share has averaged around 35-36 per cent, largely due to cesses and surcharges making up over 10 per cent of gross tax revenue.

India Ratings’ chief economist Devendra Pant has said, “Because cesses and surcharges are not shared with states, the overall pie is reduced, meaning that even if the nominal share remains unchanged, the actual funds received by states fall.” This fiscal mechanism has deepened the sense of injustice among southern states, which are already facing reduced allocations due to demographic criteria.

The North–South Divide Revisited

At the heart of the devolution debate is population and how it factors into the Finance Commission’s formula. The 15th Finance Commission, using 2011 Census data, allocates smaller shares to states with lower populations, benefiting northern states like Uttar Pradesh (UP) and Bihar, which saw population growth of 20 per cent and 25 per cent between 2001 and 2011. In contrast, Karnataka’s population grew by 15.6 per cent and Tamil Nadu’s by 15 per cent.

The income distance criterion further favours states with lower per capita incomes, granting them a higher share. Meanwhile, the five southern states remain major revenue sources, contributing over 25 per cent of India’s direct taxes and 28.5 per cent of GST collections. From fiscal 2018-19 to 2022-23, Karnataka’s GST and cess revenue grew by 56 per cent, Tamil Nadu’s by 48 per cent, Andhra Pradesh’s by 59 per cent, Kerala’s by 67 per cent and Telangana’s by 42 per cent.

Despite rising revenue collections, southern states’ share of central taxes is shrinking. In FY25, the Union government is set to allocate only 35.5 per cent of its divisible tax pool to states, lower than earlier projections. This growing imbalance fuels the argument that southern states, despite being fiscal powerhouses, are being shortchanged.

Demographics and Representation

The tax devolution debate ties into broader concerns about demographic change and political representation. Economist Lekha Chakraborty of the National Institute of Public Finance and Policy argues that “giving huge weightage on population (2011) will be an injustice to the states who have controlled their population.”

Southern states have a lower total fertility rate (TFR) than the national average but face an ageing population. In 2011, Kerala had the highest proportion of people aged 60 and above at 12.55 per cent, while Uttar Pradesh and Bihar had only 7.7 per cent and 7.4 per cent, respectively. An ageing population leads to higher healthcare and social security costs, but these are not factored into the devolution formula. While some experts see low TFR as a temporary dip that may reverse, the fiscal impact remains significant.

Southern states also fear “taxation without representation.” The delimitation exercise scheduled for 2026 will redraw parliamentary constituencies based on updated population figures, potentially reducing the number of seats for southern states while increasing representation for UP, Bihar and West Bengal. This could diminish the influence of states that contribute heavily to central taxes in determining how those funds are allocated. Finance Commission Chairman Arvind Panagariya has stated that its mandate is strictly to address states’ financial needs. Finance Minister Nirmala Sitharaman has also reiterated that tax devolution is determined solely by the Finance Commission’s recommendations and that grievances should be raised with the upcoming 16th Finance Commission, which will set allocations for 2026-31.

A Rigged System?

The dispute over tax devolution is more than just a fiscal issue; it reflects a deeper disconnect between the Finance Commission’s recommendations and state governments that increasingly feel the system is rigged against them. Southern states have long argued that the constitutional framework for resource distribution favours the Centre at the expense of state autonomy.

The Finance Commission’s formula, weighted heavily on population and income distance, penalises states with successful demographic policies and higher per capita incomes, reducing their share of tax revenues. Combined with the upcoming delimitation exercise, this has raised concerns among southern states about losing both financial resources and political representation. Ahead of the 16th Finance Commission, southern states have made it clear that they will push for a revised allocation formula; one that better reflects their fiscal capacities, developmental achievements and demographic realities.

Avantika Mehta is a senior associate editor based in New Delhi

This article is a part of 해외카지노's April 11, 2025 issue 'Viksit South', which explores the growing north-south divide in India. It appeared in print as 'South’s Tax Revolt'.