GST needs a deeper structural revamp, say Telangana and Kerala Finance Ministers

How would you rate GST up to 2022 and after?

K.N. Balagopal: By July 1, 2022, the initial five-year GST period had ended. Until then, compensation was assured by the GST Council. States were guaranteed 14% annual growth in revenues. That was like a very good honeymoon phase.

But once the compensation ended, difficulties began for the States. For instance, if the revenue growth had been maintained at that rate, Kerala would have received ₹54,000 crore last year.

In reality, we got ₹32,502 crore. So, before 2022, GST worked well; after 2022, I would rate it less than 5 out of 10.

Bhatti Vikramarka Mallu: The Government of India had assured States of 14% growth, compared with the pre-GST period, where it was around 14-18%. But after five years, we did not even reach 14%. It is around 7-8%. Clearly, the assumption that revenues would stabilise and touch 14% is not happening. The Government of India must realise this. It has to rethink the entire system.

The idea behind the five-year compensation period was also that the States would be able to strengthen their own tax revenue during this time and increase their independence. What went wrong there?

Mallu: No, it is not like that. The Government of India said that within five years, the GST would get stabilised. Maybe in the beginning, you might not get 14% growth in revenues, so we will compensate for 5 years. But they also said that over five years, the GST would get strengthened and we would automatically get 14% growth, which is not happening.

Whatever the States had to generate their own taxation is no longer with them. The pre-GST period taxes, such as VAT, Octroi, and entertainment tax, have all been brought under the GST. Except for one or two State excise levies on products, there is nothing much left for the States to increase their taxation or their revenues. Everything is in the hands of the Centre.

Is it fair to say that GST has made the States too fiscally dependent on the Centre?

Balagopal: As per the Fifteenth Finance Commission report, around 64% of the total expenditure of the entire government is borne by the State governments. And, they are saying that out of the total revenue of the government, all over India, around 63-64% is coming to the Union. So, two-thirds of the expenditure is borne by the States, but two-thirds of the revenue goes to the Centre.

We are sharing GST revenue with the Centre based on a 50-50 ratio, but actually it should be 60-40. As Mr. Mallu said, we have to look into the system in a very serious way.

If all the taxation powers are snatched and you are at the mercy of the Union government, it will not be good for the health of the country. It is not a question of whether it is a BJP-ruled State or a non-BJP-ruled State; every State is facing it. I was in the GST rate rationalisation committee for the last three to four years.

When we were sitting in the meeting, all the detailed study reports used to come. This time, no report came, only the Union Government’s suggestion. So, a detailed analysis was not done. How much is the loss? There is no clear picture. We calculated that for Kerala, we are going to incur a revenue loss of around ₹8,000-10,000 crore. Every State has its calculation. So, the actual all-India picture is not there.

The Centre says the revenue loss would be about ₹48,000 crore for this year, CM Mamata Banerjee pegs it at ₹20,000 crore for West Bengal, and Mr. Balagopal says it will be ₹8,000-10,000 crore for Kerala. What is the estimate for Telangana?

Mallu: We are saying it will be around ₹7,000. The assessment of loss due to the rate rationalisation varies from one organisation to another. Various associations that are deep into the study on the taxation system and the GST, some say it will be ₹1.4 lakh crore, while others say it will be ₹2.4 lakh crore. You don’t know exactly how it is going to affect revenues. We asked this even in the GST Council meeting, but somehow, a proper assessment of the revenue loss has not been made so far.

The overwhelming majority of GST Council decisions have been made by consensus. Does that imply that all of you agreed with the fact that the States would not be compensated?

Mallu: There are two issues in this. One is the rate rationalisation. We unanimously agreed on that. Regarding the revenue loss, in the budget preparation, we have designed so many welfare schemes and developmental activities. If suddenly, in between, the revenue comes down by ₹6,500-7,000 crore, then all these things will get halted. So, we all asked for compensation.

What was the Centre’s reaction when you asked for compensation?

Balagopal: Actually, in the agenda, the compensation question was also there. But that agenda was not discussed. We gave our speeches, we gave our notes, but what could happen on a compensation cess was not discussed.

Would it make more sense to increase the States’ share in Central taxes?

Mallu: Regarding devolution, there is a serious issue for the States. Out of the 41% divisible amount between the States, if you are distributing based on whatever you are collecting from each State, then that is fine. But you collect from all of the States and distribute it equally to the various States. That is where the States that are giving you more revenue are losing and the States that are not giving you as much are gaining. So, it has been a request among the various States that, whatever you are collecting from the States, you distribute it in that proportion.

What are the issues that you confront in terms of the State governments’ ambitions to have their own welfare schemes?

Mallu: In Kashmir, because of the cold climate, you require different kinds of welfare schemes. For States like Telangana or any other southern States, or Bihar, Uttar Pradesh, they require their own different kindsof welfare schemes. Some States might be requiring more on education. Some States might be requiring more on health, housing, or shelter.

So, based on their geographical conditions and requirements, the States will design their own welfare programmes. Whatever suits Kashmir, if the Indian government gives the same welfare scheme to Telangana, in the name of Centrally sponsored schemes, that scheme may not be useful to me. But still, you are asking me to take that Centrally sponsored scheme and pay 40%. You should allow the States to design their own welfare schemes.

Balagopal: Equity and performance both should be considered. The States that are not developed have to be given support from the Union’s fund. Kerala’s education is developed, but they are saying they will give money for making schools, which is a first-generation issue. In Kerala, we have 13,600 schools, and if they are giving money for making some kitchens or classrooms, it is not necessary.

We have second-generation issues. You are taking all the rights of collection of taxes and amassing all the taxes, and we have to go to the Centre with the requests.

You had earlier said that, with the GST, the States would be reduced to going to the Centre with begging bowls. Has this come to pass, and can the GST continue in this manner?

Balagopal: I was there in the GST Select Committee prior to the roll out of the GST. We questioned whether in the U.S., this GST type of thing existed. In the European Union, it exists. Then the Greece issue also came up. The U.S. is advanced; they have a very good system in the country, yet they do not have a ‘one country, one tax’ system, so why are we going for this? There was no proper answer, and because of the studies of Greece and other things, I dissented. In the dissent, I said now the Finance Ministers of the States will become cautious, and the States would have to come to the Centre with begging bowls. While States have not reached that stage yet, their dependence on the Centre has increased. We are supposed to be getting 41% of the Centre’s revenue for the divisible pool, technically. But practically, the Fifteenth Finance Commission said, around 20% of the entire Union government’s revenue is coming as cesses and is not coming in the divisible pool. So, practically, instead of 41% of the total Central revenue for States, it is only around 30-32%. If you ask me whether the GST will be helpful in the future, if it continues like this, then I will say that this kind of GST is not helpful for the country, not just the States, but for the country as a whole. All the States are feeling like that.

Mallu: The dependency on the Centre for the States, though I don’t want to use the term ‘begging bowl’, has increased with the GST system because the entire collection is coming to the Centre and from the Centre it is coming to the States. The GST Secretariat is filled with the Government of India officials; there is no share from the States in the GST Council Secretariat. So, whatever the GST Council Secretariat decides, their designs are coming out. If the States’ representation was also there in the GST Council Secretariat, then an equal distribution discussion would have taken place, and the solutions to the input credit kind of issues could have been known to even the States. Now, it is utter chaos.

The Centre said a lot of the revenue foregone will be made up again because the rate cuts are going to be a huge boost to consumption and the economy. Do you agree with this argument?

Mallu: They have been talking, and it has been there in the discussions and a number of articles. But we still have to see it. Until it is stabilised, we have to survive also. In the beginning, you will get affected immediately. Until the revenue stabilises due to increased sales and taxation, you will need to compensate for the initial loss.

Balagopal: There will be a boom because prices are coming down. But in a market economy, two aspects exist. One, you should have a very good supply of things in the market. Two, does the customer have the purchasing power? So, if employment is affected, your public expenses and public finance are affected, unemployment is growing, and the income is not coming, then your shops will be there, items will be there, but who will purchase them after a particular time? And if the State governments’ pockets are empty, how can the spending happen? Then how will you get employment, how will the economic activity come? So, if that balance is not there, this kind of euphoria will be for a limited time.