Even as the Central government expects the revenue implication of the revision of Goods and Services Tax (GST) rates by the GST Council to be around ₹48,000 crore, the Kerala government estimates the revenue loss to the State alone to be in the range of ₹8,000–10,000 crore. The Centre should find a way to adequately compensate the State, K.N. Balagopal, the Finance Minister of Kerala, says.

In an interaction with Fortune India, Balagopal said that an initial assessment of the revenue loss due to tax reduction in just four items— electronics, automobiles, insurance and cement—amounts to about ₹2500 crore in a year. “The new GST rates apply to more than 360 items, and we have not calculated the full impact. A comparative analysis was not done by the GST Council (secretariat) this time. We are expecting a drop in the range of ₹8000–₹10,000 crore in the annual GST revenues due to the rate rationalisation,” Balagopal said.

Responding to the Centre’s claim that the tax buoyancy that follows increased consumer spending due to low prices will compensate for the revenue loss, Balagopal said the extra money should be used to compensate the losses incurred by the States.

Earlier, in a letter to the Chairperson of the GST Council, Union Finance Minister Nirmala Sitharaman, Balagopal stated that the current rationalisation framework considers revenue neutrality at the national level; however, consumption patterns differ significantly across States. “For Kerala, where the consumption basket is heavily skewed towards higher-rate items, the impact will be disproportionately severe compared to the national average”, Balagopal points out.

“The effect of this asymmetry is already visible. Items such as chicken, which were exempt from GST, have resulted in a substantial erosion of revenue for Kerala, given its high consumption levels in the State. Similar exemptions and reductions granted to other items, without regard to State-specific consumption patterns, have prevented Kerala from recovering lost revenue”, he explains.

According to Balagopal, the sharp increase in compensation released to the State in the years following earlier rate reductions is direct evidence of this erosion. “The rate rationalisation that was implemented in November 2017, across 178 items, was a heavy blow to the revenue of Kerala. This was evident in the sudden jump in the quantum of compensation that had to be released to the state in the subsequent years, from ₹2,102 crore (in 2017-18) to ₹3,532 crores (in 2018-19) and further to ₹8,111 crore (in 2019-20)”, he said.

The Kerala government also says there has been a widening gap between 2017-18 and 2022-23 in Kerala’s protected revenue and actual GST receipts, with compensation becoming an essential support. The letter to the Finance Minister said that in 2019-20, against a protected revenue of ₹28,416 crore, the State’s GST receipts and ad-hoc settlements together amounted to only ₹20,316 crore, necessitating a compensation of ₹8,100 crore. In 2020–21, the protected revenue was ₹32,400 crore, while GST receipts and ad-hoc settlements totalled ₹19,559 crore, requiring compensation of ₹12,841 crore. “This pattern of heavy reliance on compensation persisted throughout the compensation period until 2022”, Balagopal says. Kerala has suggested that States should be permitted to collect State-specific cesses, based on the paying capacity of society, to address revenue shortfalls.

Balagopal also points out that despite reduction in taxes, past experience shows that rate rationalisation may not result in a commensurate reduction in consumer prices. He urged the Centre to bring in strong safeguards to ensure that benefits are actually passed on to the end consumer.