A three-tiered rate structure under the GST that would tax essential commodities at a lower rate, most manufacturing goods at a standard rate, and consumer durables at a higher rate, may be the best option, said Kerala Finance Minister Thomas Isaac. In an interview to BusinessLine , he also spoke about Kerala’s initiatives to tackle revenue deficit and double its tax collections as well as why the State is going ahead with a 13th Five-Year Plan. Excerpts:
The Centre and many States have scrapped Plan and non-Plan expenditure from 2017-18. Why has Kerala decided not to do it?
Kerala has decided to go ahead with its 13th Five-Year Plan. The rationale behind this is that the Plan contains all the new schemes and projects of the government, and provides a comprehensive view of their backward and forward linkages, possible future expenditure and also a fix on inter-sectoral priorities.
Once we do away with the Plan and Non-Plan expenditure, all resources will be concentrated in the hands of the Union Finance Ministry and allocations will become arbitrary. For many schemes, allocations have already been cut without any rationale, for example, Panchayati Raj departments allocation has been cut by some ₹150 crore. These are whimsical actions.
Are States prepared for GST roll out from April 1, 2017 ? Expectations from the GST Council...
GST will roll out from next April, even if there is a lack of preparedness. States will not be very worried as the Centre will provide 100 per cent compensation.
The GST Council has to function in a democratic manner. States have virtually surrendered their entire taxation powers to the Council. Now, if the Council does not respect their rights and concerns, but overrides it with technical majority, it will be bad for Indian federalism. The draft guidelines for the GST Council were very impolite.
A fundamental change in the Indian Constitutional system was the value-added tax and it was achieved without any impositions from above, just through mutual discussions between States and cooperation with the Centre. No one wants to scuttle GST, but work in consultations.
The Empowered Committee of State Finance Ministers must continue as an informal forum because it has been in existence for more than one decade and has evolved into a very effective deliberative body.
What are your expectations on the GST rates?
Nobody can tell accurately what the revenue neutral rate is. The range varies from 12 per cent to 24 per cent and the truth could lie somewhere in between. A 24 per cent rate is very high. At present, manufactured products have a tax incidence of about 30 per cent. And so an 18 per cent rate may be too low.
The other option is to have a three-tiered rate structure under GST. Consumer durables, which are mainly consumed by the richer strata, can have a higher rate. Besides, there can be a standard rate for the majority of products and a lower rate for the essentials.
Otherwise, the tax incidence on consumer durables will lower sharply while that on necessities, which are virtually tax-free at present, will increase. This will be regressive.
Whether GST would be inflationary or not would depend on whether corporates are willing to reduce their MRP prices.
We (States) also can’t take the risk of States suffering a revenue loss as the Centre will compensate only for some years. What happens after that? The social commitments of States will not decrease. Kerala will never cut down it social expenditure on public health, education, and social security. Revenue is very important for us.
What happens to the fat tax Kerala imposed this year, once GST is implemented?
When GST comes, the fat tax will go. I was initially thinking that we will get one more year. We can only argue in the GST Council and try to convince them that it should be allowed under the State GST.
Why has Kerala imposed tax on coconut oil?
There was always a tax on coconut oil. Due to the crisis in the coconut economy, we had for some time waived off all the taxes, but then realised that it was not helping the coconut farmers as oil from other States were coming in. I don’t have a problem with that but the legislative intent of waiving off the tax was not being served. So I have re-imposed the tax.
The State gets about ₹150 crore or ₹200 crore which is entirely given to the coconut growers as a subsidy. It is earmarked for procurement of coconut. We give a much higher price than what the central government gives as support price.
How is Kerala tackling its revenue deficit?
There was a process of fiscal consolidation for a decade (from 2001). But, during the last three years, the revenue has come down while expenditure has ballooned. Next year will be equally worse due to the pay revision. It is only from the fourth year that there will be substantial reduction in the revenue deficit.
Already recession like conditions is emerging in the State due to the Gulf situation. We have decided to have special purpose vehicles to borrow from the market and make capital expenditure.
We also plan to increase the revenue receipts, we want to increase from 10 per cent to 20 per cent. GST will help in that to some extent. But, there is a leakage of 30 per cent to 40 per cent, which we will try to plug by using IT.
We will introduce one major reform from the end of the year where in all dealers will have to upload their bills on real time basis on our servers, not at the end of the month.
We plan to bring legislation for this. We hope that by the end of this year, month to month revenue collections will increase will be 20 per cent.