Centre breached basic trust on which GST was designed: Kerala FM Isaac

'Raising taxes in times of recession will be counter-productive', said Issac

After the GST Council meeting on Wednesday, Kerala Finance Minister Thomas Isaac, a strident critic of the Centre’s policies, justifies his stance to Dilasha Seth. Edited excerpts:

Is the revenue position more alarming than the estimates?

There is a huge shortfall in all taxes. GST, because the sales are down, corporate tax because they (Centre) gave a big concession. They are trying to make it up by sale of assets, taking money from the central bank, but, what’s worse is that they're squeezing the states. Forty-two per cent of the give-away to corporate tax was for the states. 

Also, with GST down, the share of central taxes for states has come down. For example, in Kerala, we are expecting a shortfall of Rs 5,300 crore from the Centre’s devolution sum. The central government also slashed our public borrowing by Rs 6,500 crore, saying there was excess borrowing in 2016-17. For Kerala, our money is down by Rs 12,500 crore and then they are squeezing our compensation.

The net result is that our revenues will be Rs 20,000 crore lower than our estimates, forcing us to cut planned spending by 30 per cent. This is the case with almost all states. Even Karnataka, a revenue-surplus state for 20 years, is now revenue-deficit and is forced to squeeze expenditure.

Did you get any assurance on timely compensation disbursal from today’s (Wednesday’s) Council meeting, given that a few states are calling it ‘sovereign default?’

It is indeed sovereign default. Unfortunately, we did not get any assurance from the Centre today, which we expected. In fact, before the meeting started, I asked that the second item on the agenda should be the compensation issue; it was not part of the official agenda. It was ultimately discussed as part of the revenue augmentation presentation, for 45 minutes. However, we are totally disappointed. I don't know why the central government is behaving in this manner of taking it to a point of confrontation with the states. By October, they had sufficient money to pay compensation for August and September, so it is a big question as to why there was a delay.

Is the Centre’s behaviour putting to risk the GST’s federal framework?

Absolutely. The government has breached the basic trust on which GST was designed. It was built through a deliberative process, consensual approach. Suddenly, they have thrown all this to the bins. I am unable to understand the rationale behind this behaviour.

Do states miss former finance minister 

Arun Jaitley (now deceased), who used to take all states along in all GST decisions?

Truly. No doubt about that. Things would have been much different today (if he was still FM). He is the one who said that if the compensation collection did not match the demand for compensation, the Centre would simply borrow more and give to the states, and increase the cess years by a year or two. I don’t understand why there is some element of nastiness.

How do you see the revenue augmentation panel’s proposal on raising of GST rates?

Raising taxes in times of recession will be counter-productive. The simplest method of compensating states is that the Centre borrow, pay the states, and increase the compensation period from five years to six years or seven years.

In the pre-(Union) Budget consultation meeting, you asked for increasing the fiscal deficit limit to four per cent (of gross domestic product). Were you talking about the states’ FRBM limit or the Centre’s fiscal deficit?

I am talking about both. The current paradox is that while we are facing a recession, the central government trying to squeeze the expenditure of states in various ways.

Therefore, today, Bihar deputy chief minister Sushil Kumar Modi and I demanded the fiscal limit be raised to 4% — the FRBM limit from 3 per cent to 4 per cent, and the Centre’s (permitted) fiscal deficit from 3.4 to 4 per cent. But, when it comes to actual policies, what they are following is the opposite. In this recessionary period, states should also increase expenditure and therefore they should release our compensation dues in time. This government doesn't have a strategy on how to deal with this great slowdown. Their policies do not make sense.

Do you think they're short of ideas or ignorant about the fact that there is a slowdown?

They are making it (akin to) another demonetisation. Will someone in right senses do this? It is a case of total collapse of aggregate demand and they should immediately prop-up demand by government intervention, either through infrastructure investment by pumping in money or direct channelling to our social pension schemes, like NREGS (the rural job work guarantee). In todays’ situation, you can’t say that your fiscal deficit should remain 3.4 per cent of GDP. It (Centre) should use this crisis as an opportunity to have more reforms on increasing the ease of doing business.

Is (the GST Council) voting on lotteries, which has led to a single rate of 28 per cent on private and government-run lotteries, a partial victory for you?

It was going on for a long time and it (Council) wanted an end to it. Voting because this has been going on for a long time. 

The government of Kerala when joining the GST had negotiated for a dual rate and reached that understanding, upheld by the high court. So, it's legal. Suddenly, you want to change it. The first vote was for a single rate or dual rates, where seven states voted for dual rates and 17 states against. The second vote was for 28 or 18 per cent tax, where almost all states agreed to 28 per cent. As lowering of the rate for private lotteries to 18 per cent would have helped the lottery middlemen, we didn’t want any lowering.