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Southern states allege GST bias, project neglect

March 04, 2026 5 min read Polity & Governance Economics GS2 (Fiscal Federalism Centre-State Relations) GS3 (Indian Economy Public Finance)
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What Happened

  • Southern states — primarily Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana — have renewed allegations of systematic bias in GST revenue devolution and neglect of infrastructure projects in the southern region.
  • The states argue that despite contributing disproportionately high GST revenues (owing to their more developed economies and higher per-capita consumption), they receive a smaller share of devolved taxes than states with larger populations but lower economic output.
  • A key grievance is the population-based formula used by the 15th Finance Commission, which shifted the base year from 1971 to 2011 population data — penalising states like Kerala and Tamil Nadu that successfully implemented population control measures.
  • Karnataka's share in the divisible pool declined from 4.74% (14th FC) to 3.65% (15th FC); Kerala's share fell from 2.50% to 1.94%, representing substantial absolute revenue losses.
  • The debate is sharpening ahead of the 16th Finance Commission's recommendations, with southern states submitting memoranda seeking a revised formula that rewards fiscal performance and demographic management.

Static Topic Bridges

GST Revenue Sharing and Fiscal Federalism

Under Article 270 of the Constitution, taxes levied and collected by the Union are distributed between the Centre and states based on the Finance Commission's recommendations. GST, introduced in 2017 via the 101st Constitutional Amendment, replaced a fragmented indirect tax system with a unified national market. However, GST revenue sharing follows the principle of "destination-based taxation" — revenue accrues to the state where goods/services are consumed, not where they are produced.

  • GST has two components: CGST (Centre) and SGST (State), each at equal rates; IGST on inter-state transactions is split per Finance Commission formula.
  • The overall divisible pool (Central taxes including income tax, corporate tax, GST etc.) is shared 41% to states as per 15th Finance Commission (FY2021-26 period).
  • 15th FC devolution formula weightages: needs (40%), equity (45%), performance (15%).
  • Population (2011 census) has significant weight in "needs" component — the point of contention for southern states.
  • GST Compensation to states was guaranteed for 5 years (till June 2022) to protect revenues during transition; it has now ended.

Connection to this news: Southern states are net contributors to GST — their high economic activity generates substantial IGST, but the destination principle combined with a population-weighted formula means tax revenues generated in part by their productivity flow disproportionately to larger-population northern and eastern states.

Finance Commission — Constitutional Mandate and the Population Formula Debate

The Finance Commission is a constitutional body set up under Article 280 of the Constitution. It is constituted every 5 years to recommend the distribution of net tax proceeds between the Union and states, and among states themselves. The 15th Finance Commission (Chairman: N.K. Singh) used 2011 population data — instead of the 1971 data used by all previous commissions — marking a significant methodological shift.

  • Article 280: President constitutes Finance Commission every five years (or earlier).
  • 14th FC (Chairman: Y.V. Reddy): devolved 42% of divisible pool to states (highest ever); used 1971 population data.
  • 15th FC: reverted share to 41%; used 2011 population data — this single change penalised states with low fertility rates.
  • States with high Total Fertility Rate (TFR) — UP, Bihar, Rajasthan, Madhya Pradesh — gained relatively under the 2011 population criterion.
  • The 16th Finance Commission (Chairman: Arvind Panagariya) is currently functional and will cover 2026-2031 — southern states are actively lobbying for formula reform.
  • Kerala's TFR: ~1.8 (below replacement level of 2.1); UP's TFR: ~2.7 — the divergence explains why population-based formulas penalise Kerala.

Connection to this news: The core of southern states' grievance is that they were rewarded with reduced devolution for precisely the development outcomes — lower fertility, higher literacy, better health outcomes — that the Centre's own policies sought to promote.

Centre-State Financial Relations — Vertical and Horizontal Imbalances

Indian fiscal federalism has inherent structural tensions. The Centre collects around 70% of total government revenue but is responsible for roughly 40% of expenditure, while states collect 30% but spend 60%. This "vertical imbalance" is bridged through Finance Commission transfers, grants, and centrally sponsored schemes (CSS). Among states, "horizontal imbalance" — differences in fiscal capacity — is addressed by weighted devolution formulas.

  • Centrally Sponsored Schemes (CSS): Over 130 schemes where Centre sets conditions and states co-fund — southern states argue CSS funds are also allocated inequitably, with funds concentrated in politically targeted states.
  • NITI Aayog's Aspirational Districts Programme focuses resources on less-developed districts, most of which are in non-southern states.
  • The GST Council — comprising Finance Ministers of all states and chaired by Union Finance Minister — operates on consensus principle, but southern states have limited veto power on structural formula questions.
  • Article 293 of the Constitution governs borrowing by states — states must obtain Centre's consent if they have outstanding central loans, limiting southern states' fiscal autonomy.

Connection to this news: The allegation of "project neglect" relates to CSS fund allocation, National Infrastructure Pipeline project siting, and Rail/Road Ministry investments — all of which southern state chief ministers argue systematically bypass the south despite its superior absorption capacity and project execution record.

Key Facts & Data

  • Karnataka: devolution share fell from 4.74% (14th FC) to 3.65% (15th FC)
  • Kerala: devolution share fell from 2.50% (14th FC) to 1.94% (15th FC)
  • 15th Finance Commission chairman: N.K. Singh (covered FY2021-26)
  • 16th Finance Commission chairman: Arvind Panagariya (covers FY2026-31)
  • State share in divisible pool: 41% (15th FC) vs 42% (14th FC)
  • Key formula shift: 1971 → 2011 population data in 15th FC
  • Kerala TFR: ~1.8 (below replacement); UP TFR: ~2.7
  • Article 280: Constitutional basis for Finance Commission
  • 101st Constitutional Amendment (2016): enabled GST
  • GST compensation guarantee period: July 2017 to June 2022 (5 years, now ended)
  • Southern states' combined GDP contribution: approximately 35% of India's GDP