There’s more to Kerala’s fiscal crisis than just the lockdown

Kerala’s aggravating fiscal woes exemplified by the latest round of ‘salary challenge’ (in which the State government employees have been asked to donate April salary to fight Covid-19) have less to do with the ongoing lockdown than a legacy mental block to identifying and tapping its own tax revenue potential.

The political class has fought shy of biting the bullet and taking some evidently unpalatable measures, merely to keep the vote bank in good humour but with huge implications to the fisc, says Jose Sebastian, public finance expert and former faculty of the Gulati Institute of Finance and Taxation.

So, politicians across the spectrum fall for the next best option ― milk indirect tax sources dry to create a ‘fiscal illusion’ in which the consuming public does not instantly feel the heat of the tax impost. This is unlike suitably tweaking direct taxes ― agricultural income tax, land revenue, property tax, profession tax, stamps and registration, motor vehicles or user charges such as student fees in professional colleges and services in government-run district hospitals and medical colleges ― which is conveniently avoided. This is clear from the accompanying table.

For instance, the state could have raised substantial resources by levying appropriate user charges on services in health and education sectors that account for a bulk of the public spending, says Sebastian. But the state is faced with a situation where the rich and the middle class together corner huge subsidies which are there for the asking. In the process, the revenue sources have got narrowed down to just four items: liquor, petrol, motor vehicles and lottery, which together contributed 58.78 per cent of the State’s Own Revenue in 2016-17.

There is a desperate need to widen its own tax revenue sources. What are the options for the state? According to Sebastian, property tax holds huge potential in Kerala unlike in most of its peers. A bulk of the inward remittances right from the mid-1970s has been spent on raising residential and commercial properties.

The manpower of the Commercial Taxes Department currently lying idle can be used to assess, levy and collect property tax. Some states have made use of GPS for this purpose. Another potential revenue source is electricity duty. Electricity consumption by residential and commercial consumers is quite high in Kerala, Sebastian observes.

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