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Spirit of cooperative federalism is essential for GST to succeed


Our expenditure is increasing because of COVID and special schemes to help people, while income has stagnated; without increased borrowings no State can survive

With States’ finances in the doldrums after the second COVID-19 wave, Kerala Finance Minister K.N. Balagopal has urged Union Finance Minister Nirmala Sitharaman to allow States to borrow up to 5% of their Gross State Domestic Product (GSDP) this year, without any reform conditions. The GST regime needs urgent fixing as revenues are declining and the structure and functioning of the GST Council needs more democratisation, he said. Excerpts:

The Centre recently released ₹75,000 crore of GST dues, of which over ₹4,100 crore was to Kerala. Will this alter your borrowing plans?

I personally met the Union Finance Minister that day when they released around ₹4,200 crore to us. Even though it is belated, it is good. Due to the financial crisis in the State due to the second COVID wave, whatever money we are getting from these means are not enough for facing our requirements. Actually, the financial situation for the last five years has been stagnant, not only for Kerala but other States also. The annual borrowing limit this year has been fixed at 4% of GSDP, but only 0.5% of this is untied. An equal amount is permitted for achieving certain levels of capital expenditure and, separately, for undertaking electricity reforms. We are now discussing the latter but it’s difficult to meet all these formalities. So we have urged the Finance Minister to allow States to borrow up to 5% of GSDP, without any conditions, but they have not accepted that. So our options are limited in this scenario.

Our expenditure is increasing because of COVID expenses and special schemes introduced to help people and income has stagnated for the last few years. Without increased borrowings no State can survive, at least in the present situation.

Last year’s compensation dues are still pending and the FM had promised a GST council meet to discuss all compensation related issues. What is your stand?

The compensation issue is a serious one. We have already asked for States’ protected revenue under GST to be extended for another five years, because there’s actually a very serious fall in income since GST’s inception. There’s a systemic failure; the COVID situation and, for Kerala, floods and other natural disasters have also hit income. Almost all States are seeing a decline in income. So, the compensation should continue for another five years. The GST regime is showing some systemic failure as the income is not going up. Our average income as a percentage of sales has fallen from 16% four years back, to only 11%… prices haven’t fallen for the consumer.

This means that if we are getting ₹50,000 crore tax now, it would have been another ₹18,000 crore in the earlier kind of taxation system and [if] buoyancy had continued.

There will be a very serious discussion about the future of compensation and on the taxation policy to see if some more plugging is needed and actual taxes [need to] go up. Moreover, the devolution theory of the Central government would also have to be discussed, separately.

Could you explain this a bit?

Up to the last Finance Commission, we were getting 2.45% from the divisible pool of taxes. Now, we are getting only 1.92%. In the 1980s, our share was 3.92% so that is the fall now. That means we are not getting our rightful part from the central pool. Earlier, the 1971 population was the base, now it is 2011. Because of our development in education, health… we have some improvement and feel we are being penalised for that.

The Tamil Nadu FM has raised concerns about the constitution and functioning of the GST Council. What is your view?

The predominance of the Central government in the GST Council’s functioning was expected earlier — some of us in the committee on GST in the Rajya Sabha had given a dissent note that this will affect States’ taxation powers. Even the AIADMK was very strongly against it. The Central government is getting maximum control in the administration of the Council, and if they’re managing some States [to back them], nobody can change that decision. So, the prerogative of the Central government will succeed. Now, fortunately other parties are understanding or accepting the points which we raised. The GST experiment will not be successful. Brexit happened because Britain wanted to go out of the European Union taxation and migration laws that it felt will not be helpful. United States, which is considered business-friendly, does not have this kind of a tax system. Our counterpart from Tamil Nadu may be speaking from his experience… This is an important debate for the States and more democratisation in the true spirit of cooperative federalism should be there in the GST Council’s functioning.

Almost all States have issues with some attitude of the Central government. In the last meeting, the Centre said it has the power to tax extra-neutral alcohol. Alcohol and petroleum are not under the GST. There’s a provision in the constitution that ethanol for human consumption is under States. But they are saying that ENA is not for human consumption, so central GST will be charged. In the Council, there was a very strong protest from almost all States, whether it was BJP [ruled] or Congress [ruled].

You were part of the GoM set up by the Council on Sikkim’s demand to levy a special cess… What was the issue?

Sikkim is a very small State that is having very serious financial trouble now, because of COVID and they wanted to raise a small cess on power production and pharma. There is no special provision for that. This is the plight of the States; even a State which wanted only ₹300 crore is struggling. All the States in the GoM requested the Central government to give some additional amount to Sikkim. I said in my dissent note in the GoM that the State governments will finally have to go to the Central government with a begging bowl for their day-to-day expenditure because their entire power is going to the Centre. This will be the situation in the future for some other States too.

Infections continue to remain high in Kerala and Maharashtra, but restrictions are hurting the economy. How do you balance this?

This is a tricky question and a tricky situation. People wanted to have some relief after sitting for a year and a half… Small and medium traders are frustrated because their income is suffering. Except government officials, all others are not getting a proper income. So, naturally, they wanted to start their business. But at the same time, if all the people go about like free flies, the COVID situation will alarmingly go up and Kerala is seeing a continuous trend of more than a particular number of patients every day. So, this is a serious situation. Slowly, the market is opened up, industry is opened up. Some unrest is there, complaints are there. But the relaxations are linked to the COVID situation in local panchayat areas. There is a scientific approach to the relaxations, otherwise it will be in the doldrums.

As the Finance Minister, you are responsible for driving investments. We’ve had one investor saying publicly that he doesn’t want to invest in Kerala and is creating a fear among other investors. What is the State planning to do to correct the investment narrative?

Actually, that particular incident, we were astonished by hearing from him. Their investment plans, business model or share value — these kind of things are business decisions. It is unfortunate that a businessman openly said that he has problems in the State. No such situation was prevailing in the State. The State as well as the entire country is looking for investments. In the last year, we accepted all the proposals for improving the ease of doing business and now we are planning to bring a Bill in the Assembly for giving more help to the investors. Many big companies have shown that Kerala is a very good place for investment. That is the picture… so this kind of a bad negative remark is not correct. For bringing more investors, we are giving maximum support to them, whatever is legally possible.

Remember one thing, from 1957 onwards, Left Governments in Kerala have had the same attitude to the investors. Even in recent decades, we have got investments. Even now, many people are coming and we are trying to bring more investment by using the new online work situation. Be it back offices or other operations, now you can do a lot of things here. We want more investors to come in these areas. Not only that, we know one thing for the Kerala economy, when we need to have money for all the social sectors, we have to improve our industrial productivity, the value-added production in agriculture, and our services sector, including tourism. We are giving more emphasis on these fronts now and more measures will be taken to attract investors.



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