Tax devolution and discriminatory effects on southern India

Abstract

This paper analyzes tax devolution policies and their discriminatory impact on Southern Indian states such as Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, and Telangana, during the periods of the 10th to 15th Finance Commissions. The study utilizes secondary data to explore how India’s fiscal federalism has evolved in terms of tax devolution versus grants. The paper is divided into four sections: an introduction, a brief review of tax devolution, an examination of trends and performance of tax devolution and discriminatory effects in Southern India, and a summary with conclusions. Key findings indicate a shift from tax devolution to increased grants over time, especially during the 15th Commission, which aimed to address regional inequalities. The study also notes a rise in non-FC grants, particularly during the COVID-19 period, highlighting a trend toward flexible, program-based funding. Despite overall growth in financial allocations and decentralization, Southern states have experienced a declining share of Union taxes. This decline is attributed to lower population growth, higher per capita income, and a redistributive focus on poorer, more populous Northern states. For example, Andhra Pradesh's share decreased significantly after bifurcation, while Kerala and Tamil Nadu also saw reductions. In conclusion, the study emphasizes that India’s resource distribution has become less favorable to Southern states, reflecting broader shifts in fiscal priorities and governance strategies. It underscores the need to balance equitable tax devolution, targeted grants, and reforms to promote inclusive, high-growth development. Additionally, Southern states’ concerns about tax distribution highlight the importance of fairness and sensitivity in financial transfers to maintain national cohesion while addressing diverse developmental needs.