Kerala FM Raises Red Flags on GST Revamp

Kerala Finance Minister K N Balagopal voiced serious concerns on Tuesday over the central government's proposed Goods and Services Tax (GST) reforms, urging immediate measures to safeguard state revenues from substantial losses. While supporting tax reductions to benefit citizens, he stressed that reforms must not jeopardize the financial stability needed for public programs.

The reforms, outlined by Prime Minister Narendra Modi in his August 15 Independence Day address, aim to streamline India's GST structure by consolidating slabs into primarily 5% and 18% rates, phasing out the 28% category for most goods like cars, air conditioners, and refrigerators. Approximately 99% of items currently taxed at 12% would shift to 5%, and 90% of those at 28% would drop to 18%, with a 40% levy retained for luxury or sin goods like tobacco and aerated drinks. Exemptions are also proposed for life and health insurance premiums, alongside a GST cut on small cars from 28% to 18% to enhance affordability and spur economic growth. Authorities expect a nationwide rollout possibly by Diwali 2025, pending discussions at the GST Council meeting in September.

Balagopal cautioned that these changes could trigger an additional annual revenue shortfall of Rs 8,000 to Rs 9,000 crore for Kerala, compounding an existing Rs 24,000 crore deficit. The automobile and insurance sectors would be hit hardest, with the auto tax cut alone potentially costing Rs 1,100 crore. These losses threaten critical initiatives like the LIFE Mission housing scheme, free health insurance for over 42 lakh families, and funding for salaries, pensions, schools, and hospitals.

"If revenues keep falling, how can we sustain these essential services?" Balagopal asked during a media briefing. He noted that 95% of Kerala's income is allocated to salaries and pensions, leaving little margin for further cuts without compensation.

Nationally, GST collections reached Rs 22.08 lakh crore in 2024-25 but could drop by at least Rs 4 lakh crore under the new system, impacting funds distributed to states and, ultimately, citizens. While the Centre has alternative revenue streams to offset losses, states lack similar buffers, Balagopal argued, calling for a new compensation mechanism to avert widespread harm.

As a member of the Group of Ministers panel for GST, Balagopal plans to raise these concerns at the upcoming council meeting but expressed skepticism about immediate solutions. He highlighted that multiple states, including BJP-governed ones, face potential losses of Rs 7,000 to Rs 9,000 crore each due to the slab changes, fueling fiscal tensions with the Centre. Experts warn that without mitigation, the reforms could strain public finances in an unprecedented manner since Independence.

Balagopal also tied the reforms to global pressures, such as recent U.S. tariff hikes, which could influence India's markets and production strategies. He emphasized that tax cuts are welcome only if savings reach consumers, citing past instances where benefits favored large corporations.

Addressing allegations by Opposition Leader V D Satheesan about irregularities among some GST officials in Kerala, Balagopal promised a thorough probe, incorporating inputs from Satheesan, with strict action if misconduct is confirmed.