GST reforms surrendering to US pressure, not aimed at lowering tax burden

The GST council meeting will be held on September 3 and 4 to discuss the proposals to reduce the existing GST slabs. The Centre wants to reduce the existing four slabs (5 per cent, 12 per cent, 18 per cent and 28 per cent) to two (5 per cent and 18 per cent). The GST council meeting has been convened to get approval for this.

The new move is yet another blow to the revenue of the states after the GST. At the time when the centre decided to implement the GST itself, the adverse impact it would have on states' revenue was also pointed out in Parliament.  It became a reality, and the states were made to literally beg before the centre.

Now efforts are on to impose yet another reform that will further affect the revenue of states like Kerala.

At the time of the implementation of GST, the revenue-neutral rate was considered as about 15.5 per cent. When the tax structure was changed in 2017-18, the revenue-neutral rate came down to 11.3 per cent. The reforms led to a drastic fall in the revenue of the states. At the same time, the benefit of tax reform did not pass on to the consumers by way of price reduction. The Centre had assured a 14 per cent annual increase in tax revenue, and a compensation cess was introduced on high-value items to compensate the loss of the states. Now the compensation ceased to exist in 2022. But the states have still not achieved the protected revenue.

The benefit of tax reform never gets passed on to the consumer.

In 2017-18, tax on 178 of the 224 high-value items was reduced from 28 per cent to 18 per cent. Subsequently, in 2018 and 2019, there were revisions in the taxes. Though the justification was that the reform could lead to a fall in prices, what happened was exactly the opposite.

Kerala conducted a review of the prices of 25 products, including refrigerators, and it was found that there was no price fall in any of the products. Instead, the producers were found to benefit from it.

Kerala received a GST compensation of Rs 3,532 crore in 2018-19. In the next year, it was increased to Rs 8,111 crore owing to the reduction in tax.

Kerala had informed the GST council as well as the GoM (Group of Ministers constituted by the council) that there was no reduction in prices of products owing to the tax reforms.

Even then, Prime Minister Narendra Modi announced the fresh GST reforms by making the committee comprising ministers as well as the GST Council mute witnesses.

Revenue loss

The GST council constituted a committee of finance ministers, including Kerala, to rationalise the GST rates. But the current present tax reform proposal has come in from the part of the Union government, undermining the role of the GoM. There is no official estimate of the expected revenue loss. From the reports of different agencies, it is learnt that the loss will be between Rs 80,000 crore to 2 lakh crore. This will seriously affect states’ revenue.

It is roughly estimated that Kerala will suffer a fall of Rs 8,000 crore to Rs 9,000 crore in revenue with the proposed reforms. If the tax in the automobile sector is reduced to 18 per cent from 28 per cent, there will be an annual revenue loss of Rs 1,100 crore. There could be revenue loss in cement and other white goods. The majority of the consumer products being sold in Kerala are in the 18 per cent and 28 per cent slabs. Hence, any tax reduction in these segments will badly affect Kerala's revenue.

Exempting insurance premiums from the GST could lead to Rs 500 crore revenue loss for Kerala. States like Kerala have introduced special insurance schemes for economically weaker sections. Kerala has been providing an insurance scheme to families with an annual income below Rs 5 lakh annual income. It covers over 42 lakh families.

The move to increase tax on paper lottery from 28 per cent to 40 per cent will sabotage the Kerala lotteries, which offer livelihood to over two lakh agents and retail sellers.

It is a reality that even states ruled by parties that support the BJP government at the centre are against further reducing the GST.

States like Kerala will have to bear the burden of the loss. The Centre has many other revenue sources, including dividends from public sector undertakings and the RBI. Last year, the state government received Rs 2.89 lakh crore as dividend, and in the budget, it was announced that this year the dividend will be Rs 3.25 lakh crore. RBI gave Rs. 2.69 lakh crore to the Centre from its reserves last year.

Cess constitutes 20 per cent of the centre's revenue. From 2016-17 to 2022-23, the Centre received Rs 15.34 lakh crore as cess. This is not being shared with the states.

The prime minister claims that the GST reforms will benefit the poor and middle class. But the move is not aimed at bringing down the tax burden. It is surrendering to the international pressures.

United States President Donald Trump termed the Indian economy dead. He cited the higher tax slabs as the reason and wanted to bring down the tax. Trump imposed the higher tariffs for India with the aim of bringing down the taxes and thereby boosting the sales of international products and services in India. The Trump-Modi nexus is making it happen.

India's export value to the US was higher by Rs 3.58 lakh crore than the US's import to India. Trump wanted a change in it. Moreover, Trump has personal interests as his company has partnerships with leading builders in major Indian cities.

Trump's tariff war and Modi's GST reforms are a double whammy for Kerala. In 2023-24, exports from Kerala to the US were worth Rs 6410 crore, which was 17 per cent of the total exports to the US from India. After China, the US imports the highest quantity of spices from Kerala. With regard to seafood also 12 per cent of Indian seafood exports to the US are from Kerala. The coir sector will also be impacted by Trump's tariff war.

The fall in tax revenue will badly affect the welfare and infrastructure development activities of all states.

The Centre is obliged to resolve the revenue loss suffered by states owing to GST reforms. There should be a statutory mechanism to protect the revenue loss from the very beginning of the introduction of the reforms.

All states should stand united to protect the interests of the states.

(The writer is the finance minister of the Kerala government)