The debate between the Centre and the Kerala government on the offer and acceptance of foreign aid following the floods has drawn attention away from the core question at stake—one of fiscal federalism. The goods and services tax (GST) has increased the centralization of fiscal powers, limiting the autonomy of states to raise their own revenue for public expenditure. The interplay of the fledgling GST regime with the role and responsibilities of the Centre and states under the Disaster Management Act, 2005, (DMA) has led to an uncharted situation.
Public health, roads, bridges and ferries, inland waterways, agriculture and land are state subjects, under List II of the Constitution. The Kerala government has sought to impose a cess of 10% to finance the rebuilding of the state following the devastation caused by floods. In terms of Article 279A of the Constitution, the GST Council is the forum for approving any new state tax on account of a natural calamity or disaster.
Cesses are traditionally considered bad—“lazy taxes”—in public finance, a fact acknowledged in the Economic Survey 2013-14 (released in July 2014). The survey recommended the eventual removal of all cesses (although several central cesses, including the Swachh Bharat cess continue). During deliberations surrounding the GST Act, Union finance minister Arun Jaitely even resisted introducing an 18% cap on GST in the Constitution on the ground that a natural disaster (he cited the example of a flood) may necessitate additional tax.
Given that the taxation powers (and consequently, budgets) of states are significantly constrained on account of GST, it is incumbent on the Centre to share the states’ burdens in times of crisis. Previously, states received 60% of all indirect taxes, while the Centre received 40%. This has now changed to a 50-50 division, even though the Centre forgoes cesses. The GST is believed to increase state revenue in the long term, but, at the moment, several states, including Kerala, have reported significant reduction in tax revenues under the new tax regime. Kerala has a revenue deficit of ₹12,860 crore, or 1.7% of the state gross domestic product (SGDP). The state government had budgeted its total expenditure to rise 14% to ₹1.3 trillion in 2018-19—before the floods struck.
State governments have increased expenditure responsibilities (on account of the Ujwal Discom Assurance Yojana scheme, pay revisions and farm loan waivers)—more so in times of crises. Without an adequate share of taxes, they are pushed to borrow more, hardly a sustainable source of financing public expenditure. Kerala has requested an enhancement of its borrowing limit. Deputy governor of the Reserve Bank of India, B.P. Kanungo, recently warned against fiscal slippage and rising borrowing by states.
This problem is compounded by the lack of fund outlay under the DMA. While the DMA, which predates the GST Act, expands the role of the Centre in disaster management, this has not resulted in adequate budgetary apportionment for states. The prime minister is the ex-officio chairperson of the National Disaster Management Authority (NDMA), and secretaries of the concerned central government ministries and departments are members of the National Executive Committee (NEC). Similar arrangements are made at the state and district levels. The NEC is responsible for formulating the national plan, which the central government is to finance by making “adequate provisions”.
What constitutes “adequate provisions”, particularly after the implementation of GST? By concentrating taxing power, the 122nd amendment to the Constitution has tilted the balance of federal powers towards the Centre. Accordingly, it is not unreasonable for states to expect that the Centre will extend financial support during disasters.
Despite the statutory role of the Centre under the DMA, it places primary responsibility for disaster management on the states (as noted, for instance, in the NDMA’s 2016-17 annual report). According to a PRS legislative research analysis of the demand for grants by the Union ministry of home affairs (MHA) in 2017-18, roughly 80% of the MHA’s budget expenditure went to the police, while only 6% was spent on disaster management, rehabilitation of refugees and migrants, census and Cabinet expenses, put together. Further, the Union ministry of finance’s notice on demands for grants for transfers to states (2018-19) shows a demand of ₹10,000 crore as budgeted expenditure for 2018-19 for the state disaster response fund (SDRF) and ₹2,500 crore for the national disaster response fund (NDRF), with a clear stipulation that the “first charge” of relief expenditure is on the SDRF.
Moreover, as per the operational guidelines for the NDRF, the fund is intended only to provide immediate relief to disaster victims. Neither the NDRF nor the SDRF can be used for restoration or reconstruction in the aftermath of a disaster. These expenses are to be met from normal budgetary heads or plan funds. In 2016, the Centre decided not to establish a mitigation fund, finding that these expenses could be met through its other schemes.
The GST Council has now been asked to determine whether Kerala can raise revenues through a disaster cess. If the council finds that such a cess will destroy the uniformity of tax rates across the country, the Centre must step in with additional disaster relief to prevent excessive borrowing by the state and the makings of another disaster.