Continued VAT uptick suggests states likely to benefit from GST

Jan 24 2014, 21:16 IST
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RBI report on state finances shows VAT revenue has grown faster than states' overall tax revenue in 3 yrs. Express RBI report on state finances shows VAT revenue has grown faster than states' overall tax revenue in 3 yrs. Express
SummaryRBI report: State finances shows VAT revenue has grown faster than states' overall tax revenue in 3 yrs.

As in the previous three years of high economic growth, states' value-added tax revenue has continued to grow faster than their other major sources of “own tax revenue” (OTR) like stamp duty and excise on alcohol in the post-economic-crisis period, the Reserve Bank of India's latest report on state finances reveals. This confirms that there is little rationale for many of the country's largest states to be sceptical of the proposed goods and services tax (GST), the logical extension of the VAT system.

The BJP-ruled Gujarat and Madhya Pradesh along with Tamil Nadu and Uttar Pradesh have remained chary of GST. These states' reluctance to embrace the proposed superior comprehensive indirect tax system, coupled with a lack of Centre-state consensus on the structure and ambit of GST, has stymied its introduction for long. It now looks certain that new system won't be ushered in during the UPA-II government's regime.

The RBI report on state finances (with the 2013-14 state budgets in focus) shows that VAT revenue has grown faster than the states' overall tax revenue (including central transfers) in the three years to 2013-14. While VAT revenue grew 23.7% in 2011-12 and 19% in 2012-13, the overall tax revenue rose 19.5% and 17.8%, respectively.

The estimated growth for the current fiscal is also higher for VAT (17.2%) compared with 15.7% overall tax revenue growth.

Pertinently, this trend is particularly evident in the case of some of the states that remain indifferent to GST. Gujarat's VAT revenue surged 39.4% in 2011-12 and 19% in 2012-13, while its overall tax revenue rose 20.9% and 18.7% in the same periods. Gujarat projects its VAT revenue to grow by 23% this fiscal and growth in all taxes including transfers from the Centre is estimated at just 13.9%. The growth so far this fiscal has been around 4% only.

Despite this, in general and surely in the aggregate, states' VAT/sales tax revenue has grown much faster than the Centre's indirect tax receipts also between 2009-13. Thanks to the 13th Finance Commission award (which hiked the states' share in the Centre's gross tax revenue to 32% from 30.5% previously) and a comparatively better show by direct taxes, however, states have bolstered their tax revenue from central transfers also almost as much as they have from VAT. The Centre's indirect tax receipts, comparable to states' VAT proceeds, saw a deceleration in growth in recent years. The collections

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