"Hot on the heels of the news that the Fifteenth Finance Commission may use the 2011—rather than 1971—census as the basis for a division of spoils between the centre and states, various southern political leaders from different parties have expressed their dissatisfaction with the current federal compact. To be sure, the move to use the 2011 census would significantly disadvantage the richer and less populous southern states at the expense of the poorer and more populous northern states. There is palpable anxiety among the southern states over their share of tax revenue allocated by the centre going forward. Indeed, the chief minister of Andhra Pradesh, Chandrababu Naidu, went so far as to withdraw his Telugu Desam Party from the ruling alliance over the issue of allocation of extra funds for the development of his newly formed state.
India also recently adopted the “one nation, one tax” — goods and services tax (GST)—regime. Recall, states in India, even before the GST, had no real powers of direct taxation to levy local income taxes on their residents. Now, with the GST, states have also lost their powers of levying local indirect taxes, essentially leaving them entirely dependent for all tax revenue on a transfer formula from the centre. With a system of taxation already heavily centralized, the GST has eliminated any possibility of any genuine state-specific taxation, to pursue development or other needs deemed appropriate by state leaders as opposed to those mandated by the centre.
This extreme fiscal centralization makes India unique amongst major federal democracies in the world. Amid such renewed tensions over fiscal federalism, an interesting question to ponder is: Had there been no GST regime, would these tensions have surfaced to the extent that they have now? Could Naidu possibly have resorted to other sources of revenue through state-specific taxes and not taken the extreme step of severing ties with the ruling dispensation over allocation of funds? How much of the recent tension between the more developed states and the centre is fuelled, in part, consciously or subconsciously, by the fact that states in India no longer have any direct fiscal powers?"
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