In a first, TN suggests to 16th finance panel an ‘income distance’ norm for devolution

The Tamil Nadu government has asked the 16^th Finance Commission to adopt a different method of measuring per capita income, from nominal to purchase power parity, while calculating the biggest criterion for devolution of funds between the Centre and the State, namely, ‘income distance’. This is the first time that any State has made this suggestion.

Distribution method

Tamil Nadu, like a few others, has also asked for the introduction of a new criterion — contribution to the country’s GDP — for arriving at a fair distribution of the taxes collected. The State put forth these demands today in its “very, very detailed, most well-researched, most comprehensive” presentation to the visiting 16^th Finance Commission, making its case for how the taxes collected should be divided between the federal and State governments, Commission Chairman Arvind Panagariya told a press conference here.

Tamil Nadu, like many of the 11 States the Commission (for 2026-31) has met so far, has asked for a 50:50 split of the tax pool (“vertical devolution”) between the Central and State governments,compared with the 41:59 split recommended by the 15th Finance Commission.

income distance

The demand for changing the method of measuring ‘income distance’ comes in while calculating how the States’ share should be divvied among the States (horizontal devolution). ‘Income distance’ is how much behind a State’s per capita income is from the State with the highest per capita income; the farther a State is, the more it gets. (This implies Tamil Nadu believes that calculating per capita income on PPP basis would put it farther from the top State, fetching it more funds).

At present, the weight attached to the ‘income distance’ criterion is 45 per cent; Tamil Nadu wants it brought down to 35 per cent. On the ‘population’ criterion, it wants the Commission to use the 1971 Census as the base; the 15^th FC used the 2011 Census. The State also wants the weight attached to the population criterion to be raised from 15 per cent to 20 per cent.

On ‘demographic performance’, measured as “1 divided by the State’s fertility rate”, it wants the weight to be raised from 12.5 per cent to 20 per cent. TN, which believes that it ought to get more, said in a statement that against the 41 per cent share recommended by the 15^th FC , it got only 33.16 per cent. “Additionally, cesses  and surcharges, which constitute 16.83 per cent of the Union government’s gross tax revenue, are not shared with States,” it said.