Kerala’s development possibilities are being crippled by a fiscal crisis. While the critics allege extravagance in government operations, the State government blames the Centre for its troubles. In many ways, Kerala’s problems are no different from the financial difficulties faced by several other States. One of the fundamental issues they all confront is the ‘vertical fiscal imbalance’: the power to raise most of the taxes is entrusted with the Union government while the bigger chunk of the spending is done by the State governments.
Other than State Goods and Services Tax (SGST), the only sources of revenue for the States are stamp duty and registration fee on property transactions and on vehicles; sales tax and excise duty on a few commodities such as alcohol; and revenue from mining leases, lotteries, and so on. The States bridge the excess of expenditures over their own revenues partly with fiscal transfers, grants, and loans from the Union government and partly with their borrowings, mainly from the market. A share of the taxes collected by the Centre is devolved to the States based on a formula recommended by the Finance Commission. While earlier the States could set tax rates independently, they surrendered that right when national uniform tax rates were introduced, notably the GST regime in 2017.
