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State Tax Revenues, SGST and Central Tax Devolution are likely to fall short

State Tax Revenues, SGST and Central Tax Devolution are likely to fall short

Tag:GS -3||Economics||Public Finance||Taxation

What is the issue?

  • There is growing concern that the two main sources of state tax revenue are likely to fall short of their

2019-20 budget estimates.

  • These sources are State Goods and Services Tax (SGST) and central tax devolution.

 What would be its impacts?

  • This may result in large tax cuts or cutbacks in state-level spending by the end of the 2019-20 financial year.
  • The latter poses a risk to India’s economic growth outlook and to the liquidity role of companies participating in projects at the state level.
  • State tax revenue–Own tax revenue (now regulated by SGST) and Central Tax Devolution.
  • It is reported that SGST accounts for over 40% of the state’s own tax revenue in FY20.
  • The devolution of tax to States shall be regulated by the formula prescribed by the Finance Commissions and shall be based on the central government’s actual collections.

 What are the concerns building up related to SGST collections?

  • Substantial discrepancies: There are substantial discrepancies in the data available in the Rajya Sabha questions and in the Member States ‘ own budget on SGST and GST compensation revenues received.
  • Analysis
    • In their revised FY19 estimates, several states overestimated such revenues.
  • In the budget projections for FY20, this positive prediction of SGST collections seems to have continued.
  • State governments have forecast their SGST to rise by 11% in FY20 (budget forecasts) over their revised FY19 estimates in aggregate.
  • In the first half of the financial year, however, the growth in headline GST collections was only 5%.
  • If the rate of GST revenue growth does not pick up in the second half, SGST collections that follow the forecasts (Rs 350-400 billion).
  • The GST payment cessation received in FY20 (April-September) fell short of the compensation released this year to the states.
  • Many states require compensation
    • This is an acute concern as the 5-year GST loss payout period will end in 2022.
    • States will then have to update their expenditure in accordance with their real SGST receipts unless the period of payment is prolonged.

Way Forward

  • With virtually no room for an increase in GST rates, further strengthening of administration measures may be needed to improve the level the collections.
  • The GST council will have to discuss and formulate a solution in the coming months to compensate states for the shortfall in GST revenue.
  • Focus on non-tax revenue will need to be more.