Demonetisation effect: VAT plummets to negative in Kerala

Thiruvananthapuram: It is now official. Demonetisation has had a calamitous effect on the state’s revenues. Till November 30, the growth in value added tax was an encouraging 14 percent. During December, there was not just an alarming fall in tax revenue growth, not even stagnation, but an unheard of ‘below ground level’ drop. For the first time in two decades, VAT collections for a month fell negative, to minus two percent. From Rs 2578.76 crore during December 2016 it fell to Rs 2534.92 crore last December.

“Though demonetisation was announced on November 8, the month’s collection looked good because it was the October taxes that were coming into the state’s kitty,” a top finance department source said. “It was during December that demonetisation worked its full impact,” the official said.

Petty traders and agriculture, in less affluent districts, have been the worst hit. “This fall in tax collection reflects a delirious fall in demand, and this has affected petty traders in the countryside and dairy farmers the most,” said Dr D Narayana, director of Gulati Institute of Finance and Taxation. “As demand falls, production goes down; and as production is affected, capacity utilisation is hit; and once capacity stands unutilised, investment decisions are postponed. All of this eventually impacting revenues,” Dr Narayana said.

It is the less affluent districts like Wayanad, Idukki, Alappuzha, Kannur, and Kasargod that have recorded the worst revenue fall. “All these districts have recorded 15-20 percent negative growth in tax collections,” the official said. Ernakulam, however, has recorded a 13 percent growth in tax collection. Sales tax from petroleum products, too, has shown an upswing during December, an indication that people consumed more fuel during every visit to the petrol bunk. “This also shows that people feared that there could be shortage of fuel after demonetisation,” said Mr Javed Murukkummoottil, an IOC dealer.

Finance minister Dr T M Thomas Isaac fiscal rescue act stands decimated. Till Prime Minister announced the demonetisation drive, it looked like Isaac was engineering a turnaround of the economy. The growth in tax revenue during October had shot up to 17 percent from a mere 9 percent during August and September. Growth was worse during June and July, falling as low as 3 percent in July. The 14 percent growth in November, though not as high as in October, still managed to sustain the upward trend, and was higher than at any time during the previous UDF regime.