THIRUVANANTHAPURAM: Challenges posed by the new tax regime, post-GST, have added to the strain of Kerala economy. The stressed state finances are feared to hit rock bottom if the GST compensation ends on the original deadline of June 30, 2022. Union Finance Minister Nirmala Sitharaman in September said the Centre’s decision is not to extend the compensation scheme by another five years as demanded by various states.
She said the Centre would continue with the compensation cess till March 2026 to repay the money borrowed for compensating the states till July 2022. State Finance Minister K N Balagopal responded saying that an extension of the compensation scheme was imperative considering the big shortfall in revenue. Even if the Centre decides to extend the scheme, it is unlikely to continue the existing shortfall calculation formula, making the state’s position weaker, feel experts.
The state’s own tax revenue consists of state GST, state excise, taxes on vehicles, stamp duty and registration fees. After showing an increasing trend for five years, the state’s own tax revenue (SOTR) decreased by `321 crore in 2019-20, according to the CAG Report on State Finances for FY20. GST contributed an average 40% to the state’s own tax revenue in the 2018-19 and 2019-20 fiscals, it showed.
The non-achievement of a desirable growth in the GST revenue can be attributed partly to the string of natural disasters faced by the state, says Dr N Ramalingam, associate professor at the Gulati Institute of Finance and Taxation. “The average growth rate of VAT in the five-year period before the GST implementation was 10%. Had the VAT regime continued, the growth rate would have hovered around 12%. But with the GST and the subsequent addition of the service tax, the growth rate should have become 15% which did not happen,” he says.
One of the reasons for the non-achievement of this growth rate is the impact of the floods and Covid on the economy, he said. Another is evasion which has increased manifold after the abolition of checkpost-based surveillance. “The GST department is training its officers to plug evasion. There will be a significant increase in collections within two years,” he said.
The absence of any concrete action to check tax evasion in some businesses like gold trade is another issue. The state GST department suspects large-scale tax evasion in gold sales. The tax revenue from gold sales at the end of the VAT regime was Rs 627 crore a year, which fell to Rs 220 crore under the GST regime.
A high-level meeting chaired by Chief Minister Pinarayi Vijayan in September discussed several measures to plug evasion, including video surveillance of showrooms. A proposal being considered by the GST Council to bring gold under the ambit of e-way bill offers hope to the state. At present, gold is exempted from the requirement of e-way bill which is mandatory for the transportation of goods valued over Rs 50,000.
In the recent months, the GST department had registered several cases of illegal transportation of gold. Of late, the department has started confiscation of smuggled gold. This is after an order by the Gujarat High Court that allowed the taxes department there to confiscate the contraband invoking Section 130 of the GST Act. Till then, states invoked Section 129 of the GST Act in which the offender was let off after levying 3% GST and an equal amount as fine.
The state also hopes to gain from the GST rate rationalisation which is being discussed in the Group of Ministers. The GoM meeting scheduled for November 27 to finalise this was postponed in the last minute. “The GST rate rationalisation to get back to the revenue neutral rate, from the current tax incidence of 11% to 15%, was supposed to be discussed in this meeting,” said a senior official. The scope of the state to increase tax on liquor and fuel is limited too as the rates are very high already.
A modest increase in taxes unrevised for long and strict expenditure control measures are the need of the hour, feels economist and chairman of the Fifth State Finance Commission B A Prakash. “The economy is facing the biggest-ever crisis after the state’s formation. It is not wise to burden the people through mindless tax hikes. But taxes levied by the local self-governments which have not seen a hike in decades can be revised. It will help them extend more support to the people in the crisis time,” he said.
Digitisation and e-governance that provide ample scope for expenditure cutting measures should be given importance by the government, says Prakash. Establishment cost should be reduced. Instead of new recruitment, temporary employment should be opted for until the crisis ends. Large-scale development projects can be put on hold and focus be given on priority sectors like health, he said.
State’s stressed finances are likely to be hit badly if GST compensation ends on June 30 next year as planned. Plugging tax evasion, revising levies that have not been hiked for long and expenditure control are some of the ways state can adopt to stay afloat, say experts
(To be continued)