A year after the Centre switched to the Goods and Services Tax, the one-nation, one-tax regime is proving to be a huge disappointment as revenue tax collections are seeing a drop, in contrast to expectations. States like Kerala are reeling under the massive dip in revenue collections post GST and are staring at a financial crisis if effective measures are not taken to compensate for the lost revenue.
Kerala is struggling with a revenue shortfall of Rs 609 crore over the last 10 months, according to a report by onmanorama. The revenue shortfall has debunked the Centre's assurance that it would compensate the states for the decrease caused by the switch to the new tax regime. “With a very sharp decline in the incidence of tax burden—from up to 40 per cent in the pre-GST period—everyone would have expected the prices to decline. But they haven’t. It was expected that revenues would be buoyant, but revenue growth has been very low,” said Kerala Finance Minister Thomas Isaac in an interview to Bloomberg Quint.
The Centre had planned to compensate each state by analysing the revenue growth before the GST rollout. Kerala was expected to receive Rs 3,644 crore as compensation for two months, factoring in a 14 per cent growth estimate from the tax collection in 2015-16. The state received only Rs 2,838 crore in 2017-18, after discounting SGST and VAT collection.
“From 2006 to 2012, Kerala’s VAT revenue growth was around 20 per cent per annum. Since then, it decelerated to 10 per cent. We thought GST would provide a higher growth rate of 20 per cent. Now, the compensation component factors in at only 14 per cent,” Isaac added.
The Kerala finance minister, who is also an economist and a vocal critic of the manner in which GST was implemented by the Centre, did not hide his disappointment, especially regarding the provisions of IGST.
“For Kerala, without compensation, revenue growth is only 5 per cent when compared with the previous year. But there’s a huge accumulation of IGST, which is, in fact, a signal that things are not all that right. The tax liabilities in the entire country would come to something like Rs 5 lakh crore, while tax collection is less than Rs 1 lakh crore—meaning that there’s an input credit that’s being claimed as refund to the tune of Rs 4 lakh crore,” Isaac said.
“Everybody has predicted that Kerala will benefit the most because it’s a consumer destination state and also has high density of services. We are not able to examine the legitimacy of the input credit claimed, the e-way bill system has also not stabilised and there are tremendous leakages.”
The state expected as much as Rs 42,193 crore as tax in 2017-18. However, it received only Rs 38,407 crore. Even the compensation from the Central government could not make up for the shortfall of Rs 3,786 crore. The state government claims that the tax collection has gone up, but it has added the contribution from the Central government as well.
States are eligible to claim compensation from the Central government for five years after the switch to GST. That means Kerala cannot expect such compensation after four years. The state may head to a financial crunch after that.
State governments can no longer increase their revenue or assess the tax structure under the GST. “At every stage, there is very little autonomy or freedom regarding rates and exemptions to be given. I do agree that inter-state trade should have universally same norms. But within the state, if I want to increase the rate for a higher revenue, why I should be prevented? Or for some situation peculiar to a state, if I want to give an exemption to somebody, why should that be prevented? So states should realise what the loss of fiscal autonomy is about? I am not very happy with what has happened,” asked Isaac.
