Tamil Nadu Suggests ‘Income Distance’ Norm Revision for 16th Finance Commission

Tamil Nadu Suggests ‘Income Distance’ Norm Revision for 16th Finance Commission

Sub : Polity

Sec: Federalism

Key Proposal to the 16th Finance Commission

• New Measure for Per Capita Income:
  • Tamil Nadu (TN) proposes shifting the measure of per capita income from nominal terms to purchasing power parity (PPP) for calculating the ‘income distance’ criterion.
  • This is the first time a State has recommended such a revision.
• Introduction of Contribution to GDP as a Criterion:
  • TN advocates adding contribution to the country’s GDP as a new factor for fair tax distribution.

Redistribution Demands

• Vertical Devolution (Centre vs. State Split):
  • TN and other States request a 50:50 tax pool division between the Centre and States.
  • Current split, as per the 15th Finance Commission: 41% for States and 59% for the Centre.
• Horizontal Devolution (State-wise Distribution):
  • TN suggests a new calculation for income distance, asserting it would secure higher allocations.

Proposed Adjustments to Existing Criteria

• Income Distance’ Criterion:
  • Current Weight: 45%.
  • TN Suggestion: Reduce it to 35%.
• ‘Population’ Criterion:
  • Base Year: Use the 1971 Census instead of the 2011 Census (used by the 15th FC).
  • Weight: Increase from 15% to 20%.
• ‘Demographic Performance’:
  • Current Weight: 12.5%.
  • TN Suggestion: Raise it to 20%.

Concerns Raised by Tamil Nadu

• Reduced Tax Share:
  • TN received 33.16% share against the 41% recommended by the 15th Finance Commission.
• Cesses and Surcharges:
  • 16.83% of Union government’s gross tax revenue comes from cesses and surcharges, which are not shared with States.

Objectives of Tamil Nadu’s Proposals

• Ensure a fairer tax devolution model benefiting States with strong economic contributions.
• Address perceived inequities in allocation based on outdated criteria like nominal income and population measures.
• Secure increased funds to manage demographic shifts, development goals, and fiscal challenges.