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Windfall gains unlikely from rollout of GST'
December, 21st 2011

Kerala's typical rural-urban continuum may just go to rule out any anticipated windfall gains from the rollout of the Goods and Services Tax (GST) regime.

An impression has been gaining ground to the effect that the State stands to benefit enormously' from the GST rollout since services contribute to 61.5 per cent of the Gross State Domestic Product (GSDP).


But this may not be the case, say Mr Jose Sebastian and Ms Anitha Kumari of the Gulati Institute of Finance and Taxation (Gift) based here.

While it is too early to make any forecasts, whatever little available evidence suggests that Kerala cannot afford to be too excited about the revenue impact of GST, the authors said.

In a paper titled, Revenue and equity implications of Goods and Services Tax: A preliminary analysis,' they suggested that high expectations from a GST rollout need to be tempered with realistic assessment of the unfolding scenario.

The share of Trade, hotels and restaurants' in the State's services sector occupies a much higher ranking than is the case with other major States. Kerala is ranked fourth in terms of the size of the sub-sectors 2 and 3 under the services category.

Does it suggest that the State would be able to collect more revenue from services than Andhra Pradesh and Gujarat, ranked seventh and seventh respectively?

Herein lies the rub, the authors say. It is not the total size of these sectors but the service providers that determines a State's capacity to mobilise more revenue from service tax.

The Task Force on GST has recommended a threshold of Rs 10 lakh for individual enterprises. The higher the number of service providers above the threshold limit, higher would be the capacity of the State to collect more service tax, the authors said.


It is exactly here that Kerala's weakness comes to the fore. The main service provides that dot the rural-urban continuum are courier agencies; travel agents; tour operators; manpower recruiting agencies; shamiana contractors; real estate agents; cable operators; beauty parlours; dry-cleaning services; internet caf; outdoor caterers; and cleaning services.

All these services are taxable as per the Central Service Tax provisions. Even if one were to assume that Kerala is allowed to tax these services, not many could be expected to measure up to the threshold limit of Rs 10 lakh.

The issue of size is not just limited to these services but to others as well. Unless the States are given the freedom to fix the threshold, Kerala may not be able to mobilise substantial revenue, the authors said.

Education and health are the two major services consumed on a wider scale in the State. In the case of health services, it ranges from small pathological labs to hi-tech hospitals.

In the education sector, it ranges from small tuition centres to self-financing colleges. The Task Force on GST has recommended that the education and health services provided by the Government and non-government organisations may be kept outside the coverage of GST.

This suggests that Kerala would have to concentrate on banking, insurance, telecommunication, information technology and services provided by professional consultants.

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