During a recent session of the GST Council, a critical topic was conspicuously absent from the agenda: compensating states for revenue losses incurred due to the latest GST rate adjustments. This revelation comes from the Finance Ministers of Telangana and Kerala, both active members of the Council, who shared their insights with The Hindu. They highlighted a growing concern that the current Goods and Services Tax framework has considerably amplified states’ financial dependence on the central government, diminishing their capacity to generate independent funds for vital development projects.
Speaking at ‘The Hindu Mind’ event in New Delhi, Telangana Deputy Chief Minister Bhatti Vikramarka Mallu and Kerala Finance Minister K.N. Balagopal openly addressed the fiscal challenges states face within the existing Centre-States dynamic.
Mr. Mallu pointed out, “The Government of India had initially guaranteed states a 14% tax growth, a figure that was already a reduction from the pre-GST period’s 14-18%. However, over the past five years, we’ve observed that this 14% growth hasn’t been consistently met, hovering instead around a mere 7-8%.”
This shortfall is exacerbated by an imbalanced financial structure where states bear the majority of the nation’s expenditure, while the lion’s share of revenue is collected by the Centre.
Mr. Balagopal elaborated, “According to the Fifteenth Finance Commission report, approximately 64% of the total government expenditure nationwide is borne by state governments. Yet, about 63-64% of the total national revenue flows directly to the Union. This means states are responsible for two-thirds of the expenditure but receive only one-third of the revenue.”
Adding to this imbalance is the Centre’s strategic use of cesses. The Ministers explained that despite the Fifteenth Finance Commission recommending a 41% share of central revenue for states, nearly 20% of the Centre’s revenue comes from cesses, which are not subject to this sharing mechanism. Consequently, states end up receiving only about 30-32% of central taxes.
Anticipating a substantial blow to their revenues from the Centre’s proposed rate cuts, eight states, including Kerala and Telangana, convened in Delhi before the September 3 GST Council meeting to collectively demand compensation.
“The compensation issue was indeed on the agenda,” Mr. Balagopal confirmed. “However, it was never brought up for discussion. We presented our arguments and submitted our notes, but no conversation about a compensation cess ever took place.”
Mr. Mallu concluded that these factors collectively contribute to an increased reliance of states on the Centre, necessitating a thorough re-evaluation of the entire GST system.
“The states’ dependency on the Centre has undeniably grown with the GST system, as all collections are channeled through the Centre before being disbursed to the states,” Mr. Mallu stated.
Mr. Balagopal also noted a lack of transparency, revealing that the GST rate rationalization committee, typically responsible for detailed reports on such plans, did not receive one prior to these recent decisions.
“I’ve been on the GST rate rationalization committee for three to four years,” he recounted. “Normally, detailed study reports accompany every meeting. This time, no report was provided; only the Union Government’s suggestion. So, a comprehensive analysis was simply not done.”
“The actual extent of the loss remains unclear,” Mr. Balagopal added. “For Kerala, our calculations indicate a potential revenue loss of approximately ₹8,000-10,000 crore. Every state has its own estimates, but a consolidated, all-India picture is currently unavailable.”