Kerala should have potentially collected at least Rs. 1,825 crores in 2018-19 instead it reported an amount of Rs. 62 Crores
The apparent disappointing performance of Kerala in this area is not because consumers of electricity do not pay their electricity duty but because KSEB which collects electricity duty on behalf of Government of Kerala (GoK) has not been remitting it.
Kerala applies 10% duty on all categories of consumers except for traction (zero duty), agriculture (zero duty), and High-tension industrial consumers (specific rate of 10 paise per unit i.e., quantity-based taxation). Thus, the duty for high-tension industrial consumption turns out to be very low in effective terms.
Given that Kerala is the state with highest per capita consumption expenditure, Kerala can afford to raise the electricity duty rates at par with Punjab (13%). Further, non-domestic consumers such as industrial and commercial should afford higher electricity duty compared to domestic consumers.
More than half of Kerala's electricity consumption (51%) comes from domestic consumers. Thus, even small increment in duty rates for this consumers category brings large revenue benefits. The domestic consumers would have contributed additional revenue of Rs 2,349 to 1,246 Crores in 2018-19 provided that Kerala's tariff and duty rates were at par with either Maharashtra or Karnataka.

Introduction
With highly educated youths migrating out, Kerala needs to generate high skill jobs within the state in order to reap the full multiplier effect of its social spending on health and education and for a sustainable revenue base. It is high time that Kerala needs an adequate fiscal space for capital spending to create infrastructure to attract economic actors that can create such jobs.          
However, government finances in states of India, including Kerala, are in precarious condition especially after the pandemic. Due to the subdued economic activity owing to pandemic and related policies, revenue receipts of governments have gone south while revenue or cash expenditures in form of subsidy has gone north. For Kerala, the gap between budgeted and realised amount for states own revenue receipts excluding central transfers was of the order of Rs 22000 crore for the FY 2020-21 - a fall of 33% fall from budgeted amount of Rs 67,420. Compared to actuals of 2019-20 the fall in states own revenue was about 10% while growth in expenditure was around 12% (an increase of around 14,000 Crores). Over all the revenue deficit of was of the order of 24,200 (or 2.9% of GSDP) in 2020-21.
Having achieved good progress in human development indicators, Kerala faces a challenge of sustaining those gains which remains one of the key commitments of the state government in Kerala irrespective of their political colour. Committed expenditure of the state on account of salaries, pensions and interest, thus eat up a large chunk of the revenue receipts of the State (72% of the Revenue Receipts in 2020-21). This is likely to increase in this year owing to pay revision of government employees. Such a spending pattern leaves little room for capital spending in the state until state diligently works in a mission mode to pick-up every slack to augment its own revenue. Electricity duty may be one such possibility for the state to pick on. In the following discussion we elaborate on revenue potential of electricity duty in the state.   
Background
The electricity duty i.e., tax on electricity consumption as a source of revenue remains small but significant for many states. However, performance of Kerala remains poor in this area. For example, Kerala reported electricity duty of Rs. 29 thousand for every million units of electricity sold in 2018-19. This value appears abysmally low compared to Rs 17 lacks (Odisha), 8 lacks (Chhattisgarh, Gujarat and Maharashtra) and Rs 5 lacks (West Bengal, Himachal Pradesh and Punjab) (Figure 1). Given the consumption level and average rate of duty for different categories of consumers, Kerala should have potentially collected at least Rs. 1,825 crores in 2018-19 instead it reported an amount of Rs 62 Crores (CEA 2020, CEA 2019). Even C & AG's report on Kerala's state finances identified an arrear of Rs 1,486.50 crores as of 31st March 2019 (CAG 2021).

Figure 1: Electricity duty per million units of electricity sold (Rs. Lakh)

Source: RBI’s data on State Finances 2020 and CEA (2020)
The apparent disappointing performance of Kerala in this area is not because consumers of electricity do not pay their electricity duty but because KSEB which collects electricity duty on behalf of Government of Kerala (GoK) has not been remitting it.
For instance, as per CAG's 2016 report on Kerala's Revenue Receipts indicated that State's revenue receipts remained understated to the tune of Rs 5,123 crores between April 2002 to October 2013 on account of non-remittance of electricity duty (CAG 2016; Chapter 7). The fourth report of the IV Kerala Public Expenditure Review Committee described this problem in following words
"…. KSEB stopped remitting the payment of electricity duty almost from the middle of nineties. As large amount was due to Government, demands were raised frequently for its remittance. At that time KSEB pointed out that the under recovery of the cost of power was particularly due to non-revision of electricity tariff. Accordingly, electricity duty payable by KSEB should be set off against the notional due payable by Government towards subsidised power. The factual position is that the payment is due from KSEB.
After the setting up of SERC also the remittance of electricity duty was not made by the KSEB and the netting off of dues from both sides was taken up several times. Ultimately after the restructuring of KSEB into KSEB Limited as per Electricity Act the issue was discussed in detail and Government through G.O. (Ms) No.42/2011/PD. dated, 03-11-2011 allowed KSEB Limited to adjust the electricity duty payable to Govt. for the next 10 years towards setting up a corpus of Pension Fund. Since then, amount collected by the company is retained towards the corpus for the creation of pension fund."
The fourth report of the IV Kerala public expenditure review committee
IV Kerala Public Expenditure Review Committee (KPERC) report in 2016 recommended that such a practice should not be continued because it under-reports the revenue as well as expenditure side of the government accounts and inhibits transparency of the government accounts. It also adversely affects the parameters used for assessing performance in Fiscal Responsibility of the state i.e., ratio of Interest Payment (IP) to Revenue Receipt (RR). This view was further reiterated by the Vth KPERC as well.  For example, such a practice makes it difficult to assess the performance of K    erala vis-à-vis other states in revenue collection under this head because Kerala simply does not report how much electricity duty was collected because it never enters the Kerala state government accounts. Over and above all these complexities, Kerala State Electricity Regulatory commission (KSERC) has found that KSEB is diverting funds collected as electricity duty in areas other than pension fund as was mandated by the government order.
Having identified the major anomaly in accounting for electricity duty, we move ahead to examine the scope of improving the revenue by looking at Kerala's existing electricity tariff and duty structure and electricity consumption pattern in comparative perspective with other well performing states in India.  
Scope for improving revenue
Rationalising Duty rates for different category of consumers:
Table 1 provides rates of electricity duty for different category of consumers by some select list of states. Generally, electricity consumption in India is categorised in six categories based on the purpose of consumption i.e., consumption for 1) households, 2) commercial establishments 3) Industrial units at low voltage(tension) 4) Industrial units at high voltage(tension) 5) Agricultural activities and 6) railway traction which occurs at high voltage. Cost of supply of electricity generally is higher for domestic, agriculture and commercial consumers because low voltage transmission of electricity entails greater technical losses with high possibility of electricity theft in such areas. Further, from revenue side also Domestic and Agriculture consumers pose a challenge. Tariffs for these categories of consumers are usually low due to political considerations. However, when income of population is low, such considerations may be genuinely welfare enhancing. However, Kerala enjoys highest level per capita consumption and human development among Indian states. Domestic consumers of electricity in Kerala can comfortably afford to pay higher prices including the duty vis-à-vis other states.       
Duty on consumption of electricity for railway traction: It is surprising that most states do not apply electricity duty on consumption for railway traction including Kerala (Table 1). Among Indian states only Punjab, Karnataka and Andhra Pradesh, Jammu & Kashmir, Himachal Pradesh, Jharkhand and Bihar charge duty consumption of electricity for railway traction. Given that some states do apply duty on electricity consumption for railway, Kerala can also explore the possibility of applying electricity duty on similar grounds.
Raising electricity duty for other consumer categories
Richer states like Punjab, Maharashtra and Gujarat generally have high duty rates than Kerala for non-domestic consumers (Table 1). Further, in case of Gujarat, there is differential electricity duty rates for different consumers categories. Gujarat applies lowest rates for domestic consumers in rural areas (7.5% as compared to 15% for urban areas). It applies very steep rate of 25% for commercial consumption while for industry consuming at high voltages are charged 15% (Table 1). A slightly lower rate for industrial consumer at low voltage at 10%.

Table 1: Electricity duty as applied in different states for
different consumer categories in 2018-19

Source: Electricity Tariff and Duty Average Rates Electricity Supply in India, March 2018,        
              Central Electricity Authority, Government of India
While Punjab applies uniform rate of 13% respectively to all category of consumers including agriculture (Table 1). Kerala applies 10% duty on all categories of consumers except for traction (zero duty), agriculture (zero duty), and High-tension industrial consumers (specific rate of 10 paise per unit i.e., quantity-based taxation). Thus, the duty for high-tension industrial (HT-Industry) consumption turns out to be very low in effective terms. For comparison purposes CAG (2016; Chapter 7) pointed out that the fixed rate duty at 10 paise per unit caused effective rate of electricity duty to drop from 29% in 1988 to 2% in 2015 owing to tariff rate rising from 35 paise to 520 paise during the same period. As a result, duty rate for HT-industry never increased concomitantly with rise in its tariff rates while for other consumer categories duty rates kept rising in proportion to rise in tariff. Therefore, collection of duty remained very low from HT-industry sector. Andhra Pradesh and Telangana also suffer significant revenue shortfalls due to electricity duty being quoted in per unit or quantity terms i.e., 6 paise per unit (Table 1). In 2018-19, electricity duty collection per million units of electricity sold was mere Rs 2,000 and Rs 2,700.
It is imperative that duty rate of high-tension industrial consumers is also quoted in ad-valorem (value-based taxation) form rather than specific form which may require amendment in Kerala Electricity Surcharge (Levy and Collection) Act, 1989. It is worth mentioning that these duty structures for electricity consumption at low tension was decided as per Kerala Electricity Duty (Amendment) Act 1969 which has not changed since then. There was special Act for imposing duty on high tension electricity consumers namely Kerala Electricity Surcharge (Levy and Collection) Act, 1989 which mandated unit-based rate rather than value-based rate. Thus, there may be a need to introduce amendments to these acts for rationalisation of duty rates.
Given the inconsistencies in levying electricity within the state and a lower rate of electricity duty in comparison to other states, there is a scope for rationalising electricity duty in the state of Kerala. Given that Kerala is the state with highest per capita consumption expenditure, Kerala can afford to raise the electricity duty rates to at least match what Punjab is charging (13%). Secondly, non-domestic consumers such as industrial and commercial should afford higher electricity duty compared to domestic consumers.
Limits on scope of improving revenue under electricity duty
Kerala's ability to generate revenue through electricity duty in comparison to states like Maharashtra and Gujarat may be limited due to its consumption structure but nevertheless there is significant scope for improving it. Kerala's electricity consumption is heavily tilted towards domestic consumption. Domestic consumers consume about 51% in 2018-19 of the total electricity consumption in the state. Table 2 shows the consumption shares of commercial, Industrial and railway traction in 2018-19 where higher rates of electricity duty is generally seen as politically feasible. Aggregate share of these categories of consumers in total consumption is one of the lowest for Kerala at 34% compared to 64% in Gujarat   one of the best performers in revenue from electricity duty. Other better performing states such as Odisha, Punjab and Maharashtra however do not have such high levels of consumption share. For example, Odisha accounts about 54% of total consumption from these categories, while for Punjab and Maharashtra, these categories account for 41.6% and 46% respectively. Thus, there definitely is scope for improving revenue through electricity duty.

Table 2: Share of industrial, commercial and railway traction
total electricity consumption, 2018-19