GST: An Opportunity and Challenge for Kerala

Opinion---Jose-Sebastian

India is going to witness the most fundamental and far-reaching tax reform in the form of Goods and Services Tax (GST). This is going to integrate the country with the global tax system. The common market that India is going to be is expected to spur economic growth. Though there are a number of issues to be sorted out, the steps taken towards GST implementation are irreversible. India possesses the political and social capital to iron out differences that may crop up in the process of GST roll-out.

Where does Kerala stand in the GST scenario? Is it beneficial or harmful to Kerala? This is the issue that has engaged the attention of both political and bureaucratic elite and the common man. The impact of GST has to be looked at from the point of view of the State’s revenue, price level and economic growth. Kerala has a bloated service sector and this has prompted some quarters to predict that Kerala’s revenue will go up like anything. But a study undertaken by this author and a colleague does not share this optimism. Though a preliminary exercise with several data limitations, the findings of this study make one sit back and look at things afresh. This study argues that from the point of mobilising additional revenue, what matters is not the absolute size of the service sector per se but the presence of taxable services and the size of the service providers. State-wise share of Central Service Tax collection provides empirical basis for this argument. Kerala accounts for only 1.30 per cent of the total Service Tax revenue in 2012-13. On the other hand, industrially-advanced states like Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu and West Bengal account for 62.85 per cent. Of this, Maharashtra alone accounts for 37.81 per cent. It is not difficult to understand the reasons. The kind of services from which Government of India is mobilising Service Tax now are closely associated with manufacturing activity. Legal services, consultancy, insurance, freight and forwarding, patents and trade mark are some of them. It may be noted that almost all these states have big cities with lot of real estate and stock market-related activities.

Kerala’s service sector is littered with small fry businessmen. Some of the service providers one finds in every nook and corner of Kerala are courier agencies, travel agents, tour operators, man power recruiting agencies,  real estate agents, beauty parlours and dry cleaners. How many of them have sales turnover above the threshold limit of Rs. 10 lakh?

This does not mean that Kerala will not realise revenue increase in the GST scenario. The lion’s share of additional revenue is likely to flow from the goods sector. GST is a destination-based tax system. Now Kerala is losing significant revenue because of e-commerce. GST is likely to arrest this revenue loss to a considerable extent. The information technology-driven administrative architecture is likely to bring down tax evasion and avoidance and this is yet another source of additional revenue. But all this is contingent upon a change in the tax compliance culture of the State and the real challenge lies here.

But more revenue is not the only beneficial effect of GST to Kerala. Ours is a consumer state importing almost all consumer goods. Keralites have been at the receiving end of the cascading effect of a complex tax system and high logistic cost of transportation. Though it is feared that GST will be inflationary in the initial phase, price increase is sure to come down once the beneficial effects of GST like lower input cost and logistic cost start to flow in.

GST opens up an avenue for Kerala to launch a second industrialisation campaign. Now that raw materials, intermediate products and machinery are going to be cheaper in the GST scenario, Kerala cannot afford to miss this opportunity.  GST is thus both a challenge and opportunity for Kerala.

(The author is senior faculty with Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram; joseban59@gmail.com)