TN asks Finance Commission to consider 'income distance' for tax devolution

State also wants weightage increased for contribution to national GDP and urbanisation

Tamil Nadu has asked the 16th Finance Commission to consider adopting a different method for measuring per capita income – from nominal to purchasing power parity (PPP) – while calculating ‘income distance’.

 

Income distance is used to calculate the share of states in the divisible pool of taxes: It is the distance between a state's income and the state with the highest income. Arvind Panagariya, chairman for 16th Finance Commission, said at a press conference in Chennai on Monday that Tamil Nadu has sought reducing the income distance weightage from 45 per cent to 35 per cent and demanded its calculation after adjusting for purchasing power.

 

 

The state said that the commission should reduce the weightage given to income distance, area, and forest and ecology while increasing that given to demographic performance. The commission must include new criteria such as contribution to the national economy and share in urbanisation within the formula for horizontal devolution.

 

Alternatively, the commission may simplify the formula to focus on fewer, effective criteria for determining inter-state sharing of resources. Income distance must be adjusted for PPP and population must be derived using the 1971 Census, it said.

 

The state has recommended increasing the demographic performance weightage from 15 per cent to 20 per cent and providing 10 per cent weightage for share of urbanisation. A state’s contribution to the national gross domestic product must get 15 per cent weightage. Tamil Nadu has also sought increasing the vertical devolution (between the central government and states) from 41 per cent to 50 per cent, said Panagariya.

 

Tamil Nadu Chief Minister M K Stalin had earlier expressed his concern about the financial situation of states due to the increasing burden of implementing various schemes, calling for the need to increase the central tax share allocated to states to 50 per cent.

 

The reduction of the central tax share allocated to the state which has increased its financial contribution to the Union government schemes has hurt Tamil Nadu, he said.

 

He noted that while the Finance Commission had recommended increasing the central tax share for states to 41 per cent, the Union government had only provided 33.1 per cent in the past four years.