Kerala seeks 50% share of divisible tax pool: Central Finance Committee

The government of Kerala has urged the 16th Finance Commission to increase its share of the divisible tax pool from the 41 per cent recommended by the 15th Finance Commission to 50 per cent.

The request comes as the state seeks a larger share of the Rs 616.41 crore divisible pool, with recommendations for adjustments based on population, area, and demographic performance.

Arvind Panagariya, the Chairman of the Central Finance Committee, on Tuesday deliberated on the ongoing discussions regarding the Finance Commission's recommendations for dividing the divisible tax pool between the central government and the states.

Regarding Kerala's plea, Panagariya said that the state is seeking a larger share from the divisible pool. "Till date, we have visited 14 states, including Kerala. The state (Kerala) pleads that from 41 per cent, which is what the 15th Finance Commission had recommended, the 16th Finance Commission should increase it to 50 per cent," Panagariya added. He also revealed that Kerala's plea is for a reduction in the income-based share of the divisible pool. "Kerala's recommendation is that the portion of the divisible pool divided among the 28 states based on income differences should be only 30 per cent, compared with 45 per cent in the case of the 15th Finance Commission," he said.

Panagariya also discussed Kerala's suggestions regarding the factors used to allocate the divisible pool. He explained, "The 15th Finance Commission has said that 15 per cent of the divisible pool should be divided based on the share of each state in area. The larger the area, the larger the devolution of this part of the divisible pool." However, Kerala is asking for a smaller share. "Kerala says that from 15 per cent, that should come down to 5 per cent," he added.

Additionally, Panagariya said that Kerala is advocating for a higher share of the divisible pool to be based on the state's demographic performance. "Kerala recommends that the share of the pool divided based on demographic performance should increase from 12.5 per cent to 22.5 per cent," he stated.

He also mentioned that Kerala has suggested changes in how the Finance Commission allocates funds based on forest cover. "The 15th Finance Commission had recommended 10 per cent of the divisible pool to be divided based on forest cover. Kerala's recommendation is that only 7.5 per cent should be divided based on forest cover," Panagariya said.

Moreover, he noted that Kerala has requested the removal of the tax and fiscal effort criterion from the allocation formula. "Kerala suggests removing the criterion for tax and fiscal effort, reducing its share from 2.5 per cent to 0 per cent, and advises including population density as a criterion, allocating 2.5 per cent of the divisible pool for this measure," he added.

Speaking to the media, Panagariya explained that the Finance Commission, under the constitution, is responsible for making recommendations every five years on how the divisible tax pool should be shared between the central government and the 28 states. He said, "Under the constitution, the central government is supposed to appoint a Finance Commission every five years, which makes recommendations for five-year periods regarding how the divisible tax pool will be divided between the centre and the states, and then among the 28 states."

He further explained the broader scope of the Commission's role, which also includes making recommendations for grants to local bodies. "There are two other areas the Commission makes recommendations, basically grants. These grants, all of them, come from the consolidated fund of India, meaning they come from the budget of the union government. These grants are for the local bodies, both panchayat and municipal bodies--urban and rural local bodies," he added. "Then, there are also some grants that the Commission recommends for disaster relief, in particular, the SDRF, the State Disaster Relief Fund."

Panagariya pointed out that the 15th Finance Commission had recommended that 41 per cent of the divisible pool should go to the states, with the remaining 59 per cent going to the central government. "This commission, the base is 15 final solutions, which had recommended that 41 per cent of the divisible pool should go to the states and the remaining 51 per cent to the centre," he stated. He also stressed that the commission has until October 2025 to submit its final report.