Institute for Sustainable Development and Governanceisdg.in/wp-content/uploads/2016/10/GST-Working-Paper.pdf · Content Preface ... on progressive/direct and regressive/indirect tax.

Institute for Sustainable Development and Governance

KNRA2, TC No. 5/2555(2)Palm Dale, Golf Links, Kowdiar

ThiruvananthapuramKerala 695003, India

Goods and Services Tax: Rationale, Relevance and Implications

for India's Fiscal Federalism

Jose Sebastian

Working Paper 1

Policy Dialogue Series

EditingMini John

CoverSudheer. PY

Design & Lay outSunilji

Dr. Jose Sebastian is Associate Professor of Gulati Institute of Finance and Taxation, Thiruvananthapuram. He has also worked in Entr epreneurship Development Institute of India, Ahmedabad. Author of 5 books and 20 research papers published in national and international journals, Dr. Sebastian is a regular contributor to Malayalam dailies and periodicals on matters related to Kerala finances and developmental issues. His areas of interest include taxation, public finance, small industry and entrepreneurship.

About the Author

Content

Preface ........................................................................................ 04Abstract ....................................................................................... 05Introduction .............................................................................. ..06

I. Economic Rationale of GST in India .........................................071.Major Factors behind the Switch over to a GST Regime ...........071.1. Compulsions of a Federal Polity ............................................071.2. Narrow Tax Base ...................................................................081.3. Distortions and Complexities ................................................091.4. Need to Integrate with the Global Tax System .....................102. Steps Towards GST ...................................................................10

II. Salient Features of India’s GST ................................................133. Impact of GST on Economic Growth ........................................154. Will GST be Inflationary? .........................................................155. GST andIndia’s Fiscal Federalism .............................................166. The Steps Ahead.......................................................................17

III. GST and Kerala .......................................................................187. GST: An Opportunity for Kerala Economy ................................188. Revenue Impact of GST ............................................................189. Concluding Observations .........................................................21

Notes and References .................................................................22

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Preface

Institute for Sustainable Development and Governance (ISDG) is a public policy research and training institution that seeks to facilitate analysis and understanding of public policy discourse at the state, national and international levels. Policy Dialogue Series of ISDG is an initiative to bring together policy makers, academic researchers, media practitioners and civil society under a single roof.

The primary objective of the series is to bring knowledge and analysis of policy into the public sphere. We hope this will allow various stakeholders in the society to discuss and debate the implementation of public policy.

ISDG focuses on four areas, namely, economic governance, environmental governance, local governance and sustainable development. The 17 Sustainable Development Goals endorsed by the United Nations have direct implications on most of the social and economic policies of the government. One of the core areas of public policy is economic governance. Within the realm of public finance, the modes and manners of taxation assume greater importance in the context of economic growth and redistribution of public goods.

India has one of the lowest tax to GDP ratios among the emerging economies in the world. However, the present trend in consonance with the neo-liberal policy framework is to impose more and more indirect taxes on the common people and special tax rebates and other soaps for the corporates and the rich and powerful. This has evoked significant amounts of debates and discussions on progressive/direct and regressive/indirect tax.

It is our first Policy Dialogue Series on GST. It seeks to bring the issue of taxation to public discussion and broader policy discourse in India. The views expressed in the Policy Dialogue Series working papers are not necessarily the views of ISDG. However, our purpose is to encourage scholars and researchers to place their opinions, perspectives and analysis in the public domain so as to encourage democratisation of governance and public policies in India. We hope this Policy Dialogue Series will further deepen the democratisation of public policy and governance in India.

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John Samuel

President

India is at an advanced stage of Goods and Services Tax (GST) implementation. This paper is an attempt to provide a bird’s eye view of the rationale, relevance and implications of GST for India’s fiscal federalism. The economic rationale of GST lies in removing the distortions and complexities of a cumbersome indirect tax system that the country has been living with for the last several decades. This has been a major drag on India’s efforts to attract foreign investment and compete in the global market. GST is expected to create a common market across the country and accelerate economic growth. The expected benefits of GST include widening of the tax base of both Centre and states and significant improvement in the ease of doing business. At the same time, implementation of GST has generated apprehensions about inflation and loss of revenue to manufacturing states. GST has major implications for the future Centre – state financial relations. All these issues will have to be discussed and debated in the proposed GST Council. GST holds considerable promise for Kerala’s economy and finances. It opens up an avenue to embark on a second industrialization programme. On the revenue side, the impact of GST is likely to be moderate contrary to the widely held perception. Though Kerala economy is service sector oriented, the small size of the service providers and low level of manufacturing activity are factors that prevent the state from realising substantial revenue from the service sector. Destination based taxation, one of the key features of GST is likely to prevent the revenue loss that Kerala is experiencing at present through e-commerce. Information technology based administrative architecture of GST is likely to bring down tax evasion and avoidance that Kerala has been living with for long.

Abstract

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The long awaited Goods and Services Tax (GST) has finally arrived in India’s federal polity. With the passing of necessary constitutional amendments, it is only a matter of time, the country rolls out its most ambitious piece of tax reform. GST is touted as the ultimate solution to the problems of a cumbersome and complex indirecttax system. As the most prevalent tax system across the world, the attraction of GST cannot be overstated. Yet, when a reform of this magnitude is introduced in a country of India’s size and diversity, it generates lot of apprehensions along with the obvious excitement. This paper is an attempt to provide a bird’s eye view of the GST spectacle that India is going to witness in the immediate future. The paper is divided into three parts. In the first part, the rationale and relevance of GST in the Indian context is analysed in the backdrop of international experience with GST. The second part presents the salient features of the Indian GST model and its implications for India’s fiscal federalism. In the third part, an attempt is made to speculate on the possible impact of GST on Kerala’s economy and finances.

GST: Learning from International ExperienceGST is the system of indirect tax that prevails in 160 countries of the world. Essentially, it is a value added tax on both goods and services wherein the value added at each stage of transaction is brought under taxation with provision for set off on the tax paid at earlier stages. In order to keep the tax system simple, the number of rate categories is kept to the minimum. Accordingly, GST is levied in most countries at two rates, a standard rate and a reduced rate for certain goods and services. With a few goods and services exempt from the tax net, international experience with GST shows that it is revenue productive and contributes to economic growth by avoiding the distortions and complexities associated with cascading type sales taxes and excises

Introduction

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I. Economic Rationale of GST in India

Though India passed several stages in the process of reforming the indirect tax system, a comprehensive GST eluded the country so long for a variety of reasons. Mainly four factors underlie India's decision to switch over to a GST regime. We may briefly discuss them in some detail.

1. Major Factors behind the Switch over to a GST Regime1.1. Compulsions of a Federal PolityLike all federations, in the case of India too, the constitutional division of taxing powers between Union or Centre and federating units or states has resulted in a fiscal imbalance. While most of the elastic sources of revenue like excise, income tax, corporate profit tax and customs lie with the Centre, the main source of states which are saddled with disproportionately high expenditure responsibilities is tax on the sale of goods other than newspapers. This has resulted in a vertical imbalance between the Centre and states as regards revenue raising capacity. On the other hand, the wide inter-state disparity in the capacity to mobilise resources arising from differences in resource endowments has caused a horizontal imbalance. Article 280 of the Indian Constitution seeks to rectify these two imbalances through the institution of Finance Commission appointed once in every five years.

Since attaining independence from colonial rule, 14 Finance Commissions have submitted recommendations till date. Despite larger transfers from the Centre to states through Finance Commissions, Planning Commission and discretionary transfers by individual ministries, the fiscal problems of states have only worsened over the

1years . By the late 1980s, most of the Indian states began experiencing acute revenue deficits. Unable to meet the growing revenue expenditures, states began clamoring for larger transfers from the Centre. States had a strong grouse that Centre's tax effort in the case of

2shareable taxes has not been as strong as that of non-shareable taxes . One of the long standing demands of the states has been pooling the

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total tax revenue of the Centre so as to allow the states to share the aggregate buoyancy of all Central taxes. The recommendation of the Eleventh Finance Commission to fix 29.5% of total tax revenue of the Centre shareable between states was a step towards meeting this demand. The Twelfth and Thirteenth Finance Commissions raised the shareable pool to 30.5% and 32% respectively. The Fourteenth Finance Commission has raised the shareable pool to 42%.

All these, however, did not offer a lasting solution to the fiscal woes of states. Instead of making recommendations for transferring more resources to be shared with states, Finance Commissions in the post-liberalisation period have been trying to inculcate fiscal discipline among the states. Beginning with the Tenth Finance Commission, a series of measures have been recommended and implemented to reduce revenue and fiscal deficits of states. One major policy initiative has been to incentivise fiscal discipline by making a portion of the transfer contingent upon states implementing monitorable fiscal measures. This required states to enact Fiscal Responsibility Act and

3wipe out revenue and fiscal deficits to predetermined levels . India's decision to go ahead with GST seems to be a rather delayed recognition of the fact that increasing access to more fiscal resources is the real solution to the maladies of India's fiscal federalism than disciplining states in fiscal matters.

1.2. Narrow Tax BaseWhile the importance of a more progressive transfer mechanism is well recognised, the fact cannot be overlooked that the basic problem lies in the narrow tax base of both centre and states. The major factor contributing to this state of affairs is that the Indian indirect tax system is heavily inclined towards taxation of goods. The Seventh Schedule of the Indian Constitution which delineates the taxing powers of Centre and states does not permit either of them to tax services along with goods. However, the constitution permits both Centre and states to bring under taxation certain services. The taxes thus levied by the Centre are taxes on goods and passengers carried by railways, sea or air, taxes on railway fares and freights and taxes on expenditure in hotels and

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restaurants. Comparable taxes in the case of states are taxes on consumption of electricity, taxes on advertisement other than those published in the newspapers, taxes on goods and passengers carried by road and inland waterways and taxes on entertainments, amusements, betting and gambling. These taxes, it may be noted, are neither levied as ‘service tax’ nor known so among tax payers and tax practitioners. It has been pointed out that the total indirect taxes mobilised from these sources by Central and state governments together formed only 1% of Gross Domestic Product (GDP) or 6.6% of total tax revenue during the

4period 1985-86 to 1998-99.

Service taxation per se began in 1994 when Government of India brought three services- telecommunications, non-life insurance and stock brokers- under tax net making use of the residuary powers under the constitution. Centre has been widening the coverage of Service Tax over the years by bringing more and more services under the tax net. Now all services except those included in the negative list are brought under the Service tax net. As a consequence, Service tax has become a major revenue raiser for the Central government. Contributing just 0.44% of Centre’s total tax revenue in 1994-94, the share of service tax has gone up to 15% in 2015-16 (BE).

It is increasingly being recognised that without exploiting the untapped potential of the service sector, it is difficult for India to raise the tax-GDP ratio which is one of the lowest in the developing world. The selective taxation of services has to be replaced by a comprehensive GST that covers both goods and services in a seamless manner. Along with Centre, the states should also be empowered to tax services. The changeover to GST is the logical conclusion of the tax reform process that India has initiated with the introduction of VAT in 2005.

1.3. Distortions and Complexities India’s resolve to go ahead with GST is also influenced by the need to address the distortions and complexities of a dichotomous indirect tax system that treats goods and services separately. This has given rise to a number of issues involving efficiency, equity and compliance. Since

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services enter into the production of goods and vice versa, they will have to be brought within the purview of taxation for developing a non-cascading consumption tax system. The present system of indirect taxation places disproportionate burden on the goods producing sectors at the expense of the service sector. This can have adverse impact on the competitiveness of Indian products in the international market. This also has an equity dimension as the rich consumes more services than the poor. From the point of view of tax administration and compliance, the present system opens umpteen avenues of tax evasion and avoidance. As services form an inseparable part of manufacturing and trading activity, exclusion of services facilitates collusion of

5manufacturers and traders to evade and/or avoid tax. It should also be noted that in the emerging world of digital technology and e-commerce, the distinction between goods and services is increasingly

6getting blurred. Substantial revenue gets blocked in disputes and litigations relating to the definition of ‘manufacturing’, ‘good’ and ‘service’.

1.4. Need to Integrate with the Global Tax SystemIn the post-liberalisation period, there is heightened emphasis on states becoming fiscally more independent. Centre has been encouraging states to introduce economic and governance reforms with a view to make their economies more outward looking and attractive to foreign investors. One area where foreign investors encounter considerable difficulty is dealing with the complex and cumbersome indirect tax system of the country. This is also considered one of the major factors affecting the competitiveness of Indian products in the international market. Towards reforming the indirect tax system, a series of measures- beginning with the introduction of floor rate system to implementation of partial VAT- have been taken in the post-liberalisation period. GST which is the last lap on the reform track is hoped to integrate the tax system of the country with the global tax system.

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2. Steps towards GSTThough the need to move over to a comprehensive system of indirect tax covering both goods and services was felt quite some time, it was

7the Task Force on Implementation of Fiscal Responsibility and Budget Management Act, 2003 which advanced the idea of a ‘ destination based VAT type dual Goods and Services Tax’. The Task Force observed:

“The existing tax system introduces innumerable distortions resulting in inefficient resource allocation and adversely impacting GDP growth. It also provides an incentive to firms to engage in political lobbying for exemptions and favorable modifications in the tax schedule. The Indian consumer is known to be remarkably sensitive to apparently small changes in relative prices. The goal of a rational tax system is to empower households to engage in undistorted decision making, driven by their own needs and preferences”.

The Task Force therefore recommended that “a well-designed

destination based value added tax on all goods and services is the most

elegant method of eliminating distortions and taxing consumption”. By

1 April 2005, most Indian states had switched over to a partial VAT

regime. It appeared that the experiences gathered in the process of VAT

implementation would prepare the country for an early changeover to a

GST regime. It must have been this confidence that prompted the

Union Finance Minister to set 1 April 2010 as the date of rolling out GST.

He requested the Empowered Committee of State Finance Ministers

(hereafter referred to as Empowered Committee) which oversaw VAT

implementation to prepare a road map for implementing GST. The

Empowered Committee on its part constituted a Joint Working Group

(JWG) on GST. The report of the JWG entitled “A Model and Roadmap for

Goods and Services Tax in India-Views of the Empowered Committee of

State Finance Ministers” is the first official document containing the 8

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perceptions of states on GST. Incorporating the response of Union

government on these proposals, the Empowered Committee brought

out the First Discussion Paper in November 2009. This is a

comprehensive document outlining the salient features of the GST

model that India is going to have in the near future.

With the passing of Constitutional Amendment Bill in both the houses

of Parliament, the next step is to pass the three pieces of legislation

connected with Central GST, State GST and Inter-state GST. Half of the

State legislatures will have to pass the Constitutional Amendment Bill

and also the State GST Bill. Though it is going to be an uphill task to

complete these steps by April 1st 2017, there is a sense of urgency

visible at all levels of government to roll out GST at the earliest.

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II. Salient Features of India’s GST

Following are the salient features of India’s proposed GST.

(I) It is proposed to adopt adual GST model- the Centre levying CGST and the states levying SGST. It will cover all transactions of goods and services except the exempted commodities and services and those which are outside the purview of GST and the transactions falling below the prescribed threshold limit. The model will be implemented through multiple statutes-one for CGST and another for SGST for every state. To the extent possible, the basic features of law such as chargeability, definition of taxable event and taxable person are proposed to be uniform. The payment of the tax will be to the respective accounts of the jurisdiction.

(ii) For purposes of input tax credit, cross utilisation between CGST and SGST will not be available. Thus, input tax credit for CGST will be allowed against payment of CGST only. The same principle will be applied for SGST. For utilisation or refund of credit, a tax payer or exporter will have to maintain separate details in books of accounts. In the respective legislation for CGST and SGST, to the extent possible it is proposed to adopt uniform procedure for collection of both.

(iii) Administration of CGST and SGST will be vested with the respective governments. This would suggest that the Centre and states will have concurrent jurisdiction over the entire value chain.

(iv) The GST Council is yet to arrive at the threshold limit for CGST and SGST. It is likely that a uniform threshold is adopted across the country. There will be a simplified system of paying tax for dealers below a particular turnover.

(v) Several Central, state and local taxes which are primarily in the nature of indirect taxes or levies and “part of transaction chain which commences with import/manufacture/production of goods or provision of services at one end and goods and services at the other”

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will be subsumed by GST. The Central taxes such as central excise duty, additional excise duty, excise duty on medicinal and toilet preparations, service tax, additional custom duty known as countervailing duty, special additional duty of customs, surcharges and cesses will be subsumed by CGST. SGST will subsume VAT/sales tax, entertainment

10tax , luxury tax, taxes on lottery, betting and gambling, state cesses and

11surcharges and entry tax.

12(vi) The Centre will not levy GST on alcoholic beverages The states

can continue the present practice of levying sales tax besides collecting excise on its production. On tobacco products, the states will levy GST with input tax credit while the Centre will levy excise duty over and above GST.

(vii) States will continue to levy sales tax with the prevailing floor rate on petroleum products such as crude oil, motor spirit including aviation turbine fuel and high speed diesel oil. Centre will also continue its levies on petroleum products. The decision whether Natural Gas will be kept outside GST will be taken after further consultations.

(viii) Integrated GST (IGST) model will be adopted for taxation of inter-state transaction of goods and services. The Discussion Paper has outlined the details of the IGST model in the following words:

“The scope of the IGST model is that Centre would levy IGST which would be CGST plus SGST on all inter-state transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. The inter-state seller will pay IGST on value addition after adjusting available credit of IGST, CGST and SGST on his purchases. The exporting state will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability in his own state. The Centre would transfer to the importing State the credit of IGST used in payment of SGST. The relevant information will also be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds”.

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(ix) Regarding the rate of GST, the Centre and states are yet to arrive at a consensus. It is a matter to be decided by the proposed GST council. Indications are that a two - rate structure-a lower rate for necessaries and goods of basic importance and a standard rate for goods in general- will be adopted. The lower rate is likely to be around 12% and the standard rate will be between 18% and 22%. There will be provision for levying a special rate on precious metals and for a list of exempted items. While exports will be zero rated, both SGST and CGST will be levied on imports.

(x) The Centre will compensate the states’ loss that might emerge during the process of implementation of GST for the next five years.

3. Impact of GST on Economic GrowthIt is hoped that GST will lead to faster growth of the Indian economy over the longer term. A study done by National Council of Applied Economic Research has estimated that reduction in direct cost and cost reduction in capital inputs will lead to increased growth rate between 2% to 2.5%. The level of economic efficiency will improve across the manufacturing process through reduced input cost and improved functioning of the logistic network. The simplified tax system will lead to better tax compliance through reduced tax evasion and expansion of the base. But in the initial phase of GST, growth may in fact slow down because of the higher rate of tax on services which account for 60% of GDP. Service tax which is 15% at present is likely to go up to 18% to 22% depending upon the decision of the GST council.

4. Will GST be Inflationary?There is a lurking fear that GST will be inflationary. To a large extent, this depends upon the rate of GST. A lower rate of 12% and standard rate of 18% may not cause much inflationary price rise. But if the standard rate goes up to 22%, there can be some impact on inflation. It may be noted that service sector which contributes 60% of GDP at present suffers only 15% tax which is likely to go up to 18% or even to 22%.

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Another source of inflation is the tax compliance environment of GST. The information technology administrative architecture of GST known as Goods and Services Tax Network (GSTN) is likely bring down tax evasion and avoidance to a significant level. If this necessitates the traders to pass on the tax to the consumers, it may cause price rise depending upon the level of competition in the market. In the present tax system, tax evasion and avoidance is quite rampant and the benefits are shared between traders and consumers in varying degrees depending upon the level of competition in the market.

5. GST and India’s Fiscal FederalismWhile Indian states do not enjoy the kind of autonomy that states in federal countries like United States enjoy, they do enjoy a fair degree of autonomy with respect to fiscal powers. There is a lurking fear among the states whether GST would eat into their limited fiscal autonomy. It seems that the assurances about compensation have not completely removed the fears of states on revenue loss. The apprehension of the manufacturing statesis whether GST will result in a permanent dent in their resource base. This seems to be a major reason why the states have been striking a hard bargain with the Centre in the course of negotiations.

States, in general, have expressed their reservations on the composition and powers of GST Council. Regarding the composition of GST Council, it has been decided that the weightage of Centre and states will be one- third and two-third respectively. GST Council has a critical role in building consensus among the states in matters of rates, exemptions and threshold limit.

Will GST strengthen India’s fiscal federalism? It appears that the benefits of GST will not be uniform across Centre and states. Centre’s tax base is likely to experience a widening to the tune of 20% to 30% as the point of levy gets shifted from manufacturing to retail. The revenue impact of GST on states however will vary widely depending upon their economic circumstances. This would suggest that vertical and

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horizontal imbalances in India’s fiscal federalism is going to widen. The future Finance Commissions have a major role to address this issue.

6. The Steps AheadAll out efforts are being made to roll out GST by April 1, 2017. To meet this target, the Finance Minister Mr. Jaitley is reported to be eying on the Winter Session of the parliament to see through all the three pieces of legislation connected with Central GST, State GST and Inter-State GST. Half of the state legislatures will have to pass the Constitutional Amendment Bill. Also, GST bills will have to be passed by the State legislatures. Considering the complexities involved, the time frame of GST roll out appears to be quite ambitious.

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III. GST and Kerala

As a state undergoing acute fiscal crunch, Kerala is looking forward to GST with lot of hope. It is generally held that Kerala will be a major beneficiary of GST as the state is service sector dominated. According to the quick estimates for the year 2014-15, service sector contributes 62.28% of Gross State Domestic Product(GSDP). How GST is going to impact on Kerala’s finances and economy? This section attempts to answer this question.

7. GST: An Opportunity for Kerala EconomyAs an industrially backwardconsumer state, Kerala imports lion’s share of the goods consumed in the state. Located in the southernmost tip of the country, Keralites have been destined to bear the costs associated with multiple taxes and logistics. GST is expected to benefit Kerala in various ways. First, significant reduction in the prices of consumer goods can be expectedonce the beneficial effects of GST start to set in. Second, GST is going to make raw materials, intermediate products and machinery cheaper. This opens up an avenue for Kerala to embark on an aggressive industrialization programme. At present agricultural products like rubber, coconut and spices are exported to other countries and states without much processing. GST offers an opportunity to convert them into value added product and market across the country.

8. Revenue Impact of GSTAs a fiscally stressed state, one of the major concerns of Kerala is how much additional revenue GST is going to generate. There is a widely held perception that as a service sector dominated state, GST will be a revenue raiser for Kerala. But the findings of a preliminary study

8undertaken in Gulati Institute of Finance and Taxation raises doubts

13about this optimism The basic premise of this study is that from the point of view of mobilizing additional revenue what matters is not the size of the service sector per se but the presence of taxable services and the size of the service providers. This is evident from the state-wise

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share of Central Service Tax collections. Industrially advance States of Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu and West Bengal account for 62.85% of Service tax collections in 2012-13. Of this, Maharashtra alone accounts for 37.81%. The data and evidences presented in the study show that the potential for Service tax is closely linked to the various services associated with manufacturing activity. Some of the major among them are legal services, patent and, trade mark, freight and forwarding, insurance, accounting and consultancy. Besides, states having metropolitan cities with large presence in activities like real estate, finance and information technology are also able to mobilize more Service tax revenue.

On the other hand, industrially backward Kerala accounts for just 1.30% of Central Service Tax collection in 2012-13. Kerala’s bloated service sector is dominated by small fry business men majority of whom l falling below the proposed threshold limit of Rs.10 lakhs. Typical taxable services which one can find in small towns across the state are shown in Box-1.

1. Courier agencies2. Travel agents3. Tour operators4. Man power recruiting agencies5. Pandal shamiana contractors6. Real estate agents/consultants7. Cable operators8. Beauty parlors9. Dry cleaning services10.Internet café11.Outdoor caterers services12.Cleaning services

Box-1 Typical Small Service Providers in Kerala’s Service Sector

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Vast majority of the above service providers are likely to fall below the proposed threshold limit of Rs.10 lakhs. If the states are given the liberty to fix the threshold limit, Kerala may be able to mobilize a few more crores by maintaining a lower threshold limit.

Education and health are the two fast growing sectors of Kerala economy. As of now, only a small portion of these two sectors will come within the purview of GST. Perhaps Kerala will have to carry other states along and exert pressure in the GST Council to give flexibility to bring under tax net these two sectors.

If this is so, how GST is going to benefit Kerala? It is not the service sector as is often held but the goods sector that is going to bail out Kerala. First, the destination principle underlying GST will ensure that e-commerce which has turned out to be the bane of Kerala will be brought under the tax net. The e-commerce companies catering to the upwardly mobile segment of the consumers in Kerala are now paying the tax in the states from which the transaction originates. With GST in place, Kerala is supposed to get this revenue. Second, the information technology driven administrative architecture of GST can be expected to bring down tax evasion and avoidance significantly. It may be noted that despite tremendous increase in the potential for taxation over the years, Kerala has only lagged behind in public resource mobilization. In 1980-81, Kerala’s share in the total tax revenue mobilized by all states and union territories was 5.09%. This has come down to 4.32% in 2012-13.

At the same time, it may be unrealistic to expect GST to solve the fiscal problems of Kerala. Even if it is assumed that GST will bring Rs. 5000 crores of additional revenue, it is not going to have much of an impact on the fiscal front when the state is going to have a revenue deficit of Rs.18,000 crores in the fiscal 2016-17.

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9. Concluding ObservationsFor a country of India’s size and diversity, it is indeed an achievement to introduce a major tax reform like GST. India has the political and social capital to iron out the differences that may crop up in the process of GST implementation. The country has ushered in an era of co-operative federalism. Arun Jaitley, the Finance Minister is reported to have stated that “States and Centre will be pooling in their sovereignty together and create a new mechanism which will take all its decisions within that pooled sovereignty” . One can only hope that the optimism that Mr. Jaitley exudes becomes a reality.

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Notes and References

1) Though the constitution makers had envisaged Finance Commissions as the single agency for transferring resources from the Centre to states, over the years, sizeable resources happened to be transferred through other agencies like Planning Commission and various ministries. Even the institution of Finance Commission has increasingly become politicised over the years. The political economy of complex Centre-state financial relations is discussed in depth in M. G Rao andNirvikar Singh, Political Economy of Federalism in India, Oxford University Press (New Delhi), 2005.

2) Centre often resorted to additional resource mobilisation through levying Additional Excise duties and special duties over and above the basic duties. While the revenue from the basic duties is sharable with the states, the same from these levies is non- sharable. It is also alleged that the exemptions and concessions offered by the Centre in basic excises resulted in diminution of the size of the shareable pool.

3) Jose Sebastian, “Centre State Financial Relations in the Post-liberalisation Period”, in B.A Prakash(ed.), Indian Economy since Independence: Economic Reforms and Performance, Pearson(New Delhi), 2008, pp.587-603.

4) M.G Rao, “Taxing Services: Issues and Strategy”, Economic and Political Weekly, No.36 (2001), pp.4000-4006.

5) Ibid, p.4002.

6) AmareshBagchi, “Taxing Services: The Way Forward”, Economic and Political Weekly, No.39(2004), pp.1876-1878.

7) Government of India, Report of the Task Force on Implementation of Fiscal Responsibility and Budget Management Act 2003, July 2004.

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8) Empowered Committee (2008).

9) Empowered Committee (2009)

10) Though entertainment tax is levied and collected in most states by local bodies, some states levy and collect it. In the case of these states, SGST will subsume entertainment tax.

11) SGST will not subsume entry tax levied by urban local bodies like municipal corporations which are in lieu of octroi, a tax on goods entering into a local area.

12) While implementing VAT in India, alcoholic beverages and petroleum products were kept outside VAT. These two items together contributed nearly 50% of the total sales tax revenue of most states. The level of tax compliance in the case of these two items is comparatively higher as both are dealt by public sector enterprises in most states. While petroleum products are marketed by Central public sector enterprises, wholesale and retail trade ofalcoholic beverages is mostly handled of public sector marketing companies. It seems that by keeping these two assured sources of revenue outside VAT, the states sought to provide some cushion to the risk of revenue loss while introducing VAT.

13) Jose Sebastian and AnithaKumari. L, “Goods and Services Tax: Will it be a Panacea for Kerala’s Fiscal Woes?”, Working Paper 1/2015, Gulati Institute of Finance and Taxation, Thiruvananthapuram.

14) Jose Sebastian,” Pothuvibhavasamaaharanam: KeralamEngottu”? (Public Resource Mobilisation: Where is Kerala Heading for?), Mathrubhoomidaily, June 25, 2016, p.4.

15) Report, Business Standard, August 9, 2016, p.1.

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