The GST Council did not discuss the issue of compensating States for revenue loss due to the latest rate cuts, the Finance Ministers of both Telangana and Kerala, members of the Council, told The Hindu. They added that GST has substantially increased the dependence of the States on the Centre, and has eroded their ability to raise their own funds for developmental expenditure.

Speaking at The Hindu Mind event in New Delhi, Telangana Deputy Chief Minister Bhatti Vikramarka Mallu and Kerala Finance Minister K.N. Balagopal opened up about the issues that the States had with the current Centre-States fiscal dynamic.

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“The Government of India had assured the States that they would get 14% tax as against the pre-GST period where it used to be somewhere around 14-18%,” Mr. Mallu explained. “But by the end of this period, what we have realised is that, forget about 18%, they have not stabilised 14% growth in tax revenue in these five years. It is around 7-8%.”

Coupled with this is the fact that the bulk of the expenditure in the country is incurred by the States, while most of the revenue goes to the Centre.

“As per the Fifteenth Finance Commission report, around 64% of the total expenditure of the entire government is borne by the State governments,” Mr. Balagopal said. “And they are saying that out of the total revenue of the government, all over India, around 63-64% is coming to the Union. So, two-thirds of the expenditure is borne by the States but two-thirds of the revenue goes to the Centre.”

This structure, the two Ministers added, was further unbalanced by the Centre’s use of cesses. They said that, while the Fifteenth Finance Commission had recommended that the Centre share 41% of its revenue with the States, about 20% of its revenue comes from cesses that do not need to be shared. As a result, about 30-32% of Central taxes are actually shared with States.

Expecting a significant hit to revenues due to the Centre’s proposed rate cuts, eight States, including Kerala and Telangana, met in Delhi prior to the GST Council meeting on September 3 and decided to ask the Council for compensation.

“Actually, in the agenda, the compensation question was also there,” Mr. Balagopal said. “But that agenda was not discussed. We gave our speeches, we gave our note, but what could happen on a compensation cess was not discussed.” 

Mr. Mallu said that all of these factors increased the States’ dependence on the Centre and that the GST system would need a considerable re-think.

“The dependency on the Centre for the States… has increased with the GST system because the entire collection is coming to the Centre and from the Centre it is coming to the States,” Mr. Mallu said.

Mr. Balagopal said that the GST rate rationalisation committee, which usually receives detailed reports on any rationalisation plans, did not receive one prior to the latest decisions.

“I was in the GST rate rationalisation committee for the last 3-4 years,” he explained. “When we were sitting in the meeting, all the detailed study reports used to come. This time, no report came, only the Union Government’s suggestion. So, a detailed analysis was not done.” 

“How much is the loss, there’s no clear picture,” Mr. Balagopal added. “We calculated that for Kerala, we are going to see around ₹8,000-10,000 crore revenue loss. Every state has its calculation. So, the actual all-India picture is not there.”