GST was a mistake, it’s time to repair the damage: Kerala FM KN Balagopal

(Of course, the 15th FC sought to balance this by also rewarding population control efforts even though in the 2011 census it was a question of determining the inter se share of the common taxes divisible between the states).

By KG Narendranath & Prasanta Sahu

The concept of the goods and services tax (GST) was antithetical to federalism to begin with, said Kerala Finance Minister KN Balagopal, adding his voice to a growing chorus of state finance ministers and policy experts public seeking a complete overhaul of the structure, design and administration of the four-year consumption tax. “Co-operative federalism is at stake. The GST has not delivered the promised revenue productivity. Let us at least learn from experience and restructure the tax. The (lack of) democratic functioning of the GST Council also gives rise to real concerns. It is up to the Union government to show state of mind and repair the damage caused by the GST to the finances and fiscal powers of states, ”he told FE.

Citing the ‘rarest of rare’ economic problems his state has faced over the past four or five years due to natural disasters, including the severe floods of 2018 and pandemics, Balagopal said that Kerala, with a an honorable record in “human capital development”, was all but thwarted in its efforts to address “second generation” problems in health care, education and employment through various national policies and a move away from federalism.

“The Center must renounce assuming a more important role than that envisaged in the Constitution … if the Center fulfills its promises and respects the constitutional division of powers between itself and the states, then Kerala will confidently emerge from the current crisis and do so. further progress towards sustainable and multifaceted development, ”Balagopal said.

While some state finance ministers, including Amit Mitra of West Bengal and Manpreet Singh Badal of the Punjab, have not mince words lately in their criticisms of the way the GST Council operates, Balagopal, a first Minister who took office on May 20, was more restricted. “I believe it is incumbent on the Union government to build confidence among all members of the TPS Council that a true democratic spirit will govern the functioning of the Council. Decision making must be by consensus and the process must be convincing for all. We have the feeling that in fiscal matters, the powers of the Center are increasing. This needs to be verified. All board stakeholders must feel that justice prevails and is served to them. “

He added that the Center should really work hard to avoid conflicts in the council. Kerala’s finance minister, however, refused to pledge allegiance at the request of a dispute resolution body reporting to the GST Council. “The council is a body of senior political leaders. It must be competent to settle disputes and prevent their occurrence. He said the Center would do well to endorse the idea that it alone possesses sound policy judgment and appreciates states knowing best what is best for them. It must be recognized that States “are equal partners, equally mature and responsible in matters of governance”.

Balagopal said his state’s best bet for increasing income in the medium term was “(higher GSDP) growth”, although the immediate imperatives were increasing public spending and adopting policy ” health first “. “As we get Covid-19 under control earlier than others, we will likely have a head start and economic activities, including tourism, will get a boost. Income transfers to people who lost their livelihoods due to Covid-19 – Rs 8,900 crore in current fiscal year; an interest rate subsidy on loans channeled through cooperatives to the agricultural sector and MSMEs (Rs 8,300 crore) and sustained momentum in public infrastructure financing would help boost consumption, the minister said.

In the revised fiscal year 22 budget presented to the state assembly on June 4, Balagopal estimated tax revenue growth of only 6.5 percent year-on-year, out of an assumed nominal MSRP growth of 6, 6%. Tax revenues weakened and fell below historical levels after the introduction of the GST despite the GST clearing facility (guaranteed 14% annual growth) and S-GST revenues accounting for half of revenues state taxes, he said.

The budget foresees a sharp reduction in the GSDP’s budget deficit from 4.25% in FY21 to 3.5% in FY 22 and to 3% in FY 23. Asked about results of a strong medium-term fiscal correction envisioned in the budget, the minister said that a likely pick-up in economic growth over the next fiscal year could improve momentum, while “we also need to focus on more collection. efficient taxes. and may need to introduce new taxes ”.

Balagopal, who wrote a dissenting memo against the GST as a member of a 2015 select parliamentary committee, said his state would oppose any move to include sales taxes / VAT on gasoline and diesel in the GST, as this would restrict the autonomous fiscal space of the states to a very low level (over a third of Kerala’s own tax revenue comes from these levies). Since few states have seen their natural growth rates in recent years, it was legitimate to extend the GST compensation mechanism for five years beyond July 2022, he said.

Kerala’s income deficit has been one of the highest among Indian states thanks to its liberal social spending, higher current spending, and below-potential income growth. Salaries and pensions made up almost a third of total government spending in FY20 and recent salary increases could mean these would stay close to that level for at least the next few years – increases Annualized salaries and pensions between FY20 and FY22 (BE) are observed at 12% and 10% respectively. Asked about it, the minister said that while every effort will be made to reduce the revenue deficit, its elimination may not be possible. In FY21, Kerala’s revenue deficit was 2.94% of GSDP (revised estimate), or 59% higher than the original estimate (BE).

The Minister strongly protested against a sharp drop in the State’s share in the Center’s divisible fiscal pool; from a level of 3% in the 1980s, this share fell to 2.5% during the allocation period of the 14th Finance Committee (2015-20) and to only 1.92% during the period of the 15th FC (2021-2026). “We have excelled in population control… it is an irony that instead of being rewarded for achieving a national policy goal, we are being punished for it,” he said. (Of course, the 15th FC sought to balance this by also rewarding population control efforts even though in the 2011 census it was a matter of determining the inter se share of common taxes divisible between states).

Between the 14th and 15th FC periods, Kerala’s share in the divisible tax pool fell by a quarter and was the largest drop among Indian states. The gross tax revenues of the submitted Center, coupled with the effect of the CF attribution, means that the state’s share in central taxes decreased by 53% compared to the budget estimate (BE) over the course of exercise 21; Also for FY 22, the revised budget recognized that the state would only get Rs 12,812 crore in the form of central fiscal transfers, or Rs 3,748 crore less than estimated in the budget presented in February by the Balagopal’s predecessor, Thomas Isaac. Of course, a higher than expected income deficit grant from the Center (Rs 19,891 crore in 2021-2022) helped, but this grant, estimated at Rs 37,814 crore in 2021-2026, would gradually decrease.

Although Kerala’s budget investment spending is only 9% of its total spending, significant additional asset creation spending is undertaken through the Kerala Infrastructure Investment Fund Board (KIIFB), an outside legal entity. budget. When asked whether the recent controversy over KIIFB – CAG opposed KIIFB borrowing, claiming it violated the limits on public borrowing under Article 293 (1) of the Constitution, Balagopal KIFB loans did indeed have RBI approval, adding that KIIFB, with robust repayment capacity, was confident of raising as much money as needed to finance expensive infrastructure projects already announced.

Balagopal said higher borrowing was inevitable for the state at this point to relieve the population and boost its economy. Some of the conditions attached to a higher borrowing limit – electricity distribution reforms that involve the state taking over the responsibilities of the electricity board – were difficult for the state to meet because they were incompatible with the political line of the ruling Left Democratic Fund, the minister said. Government borrowing of Rs 75,189 crore in FY21 was found to be 52% higher than BE and is expected to increase by 13% year on year in FY 22.

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