Continued VAT uptick suggests states likely to benefit from GST

fe Bureau Posted online: Friday, Jan 24, 2014 at 0000 hrs
New Delhi : 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 of excise, customs duty and service tax by the Centre grew just 13.7% in 2011-12 and 21% in 2012-13.

Clearly, states are reporting higher tax revenue growth than the Centre, the primary reason why their fiscal consolidation has been better while the Centre's has slipped considerably. To increase their own tax revenue, many states have raised taxes on tobacco and liquor products and some have benefited from simplifying procures that enhanced tax compliance. Analysts, however, point out that even though VAT was meant to lead to harmonisation of rates, this hasn't actually happened, with the tax being levied at rates ranging from 1% to 15%.

States that embraced VAT in 2005-06 had seen higher-than-historical growth in their sales tax/VAT revenue in the 2005-08 high-growth period also, establishing that the VAT system generates incremental revenue.

In states' revenue kitty, tax revenue accounts for the bulk, of which their OTR forms the major chunk, completed by the states' share in the central taxes. Within tax revenue, the largest item is VAT/sales tax followed by taxes on property (stamp duty and registration fee), state excise on alcohol and the taxes levied on vehicles. (To illustrate, 80% of Uttar Pradesh's estimated revenue of Rs 1.77 lakh crore this fiscal comes from taxes and within this tax revenue, over half will come from the states' OTR, of which 60% will be from sales tax/VAT/CST).

RBI deputy governor Urjit Patel says in a foreword to the report released on Wednesday: “State budgets for 2013-14 indicate a further move towards fiscal consolidation... During 2013-14, the revenue surplus-GDP ratio is budgeted to increase to 0.4% (from) 0.2% in 2012-13, contributing to a reduction in the gross fiscal deficit-GDP ratio to 2.1% (from) 2.3% in 2012-13. Revenue surplus is budgeted in 22 out of the 28 states in 2013-14.”

States' own revenue and transfers from the Centre as a proportion to GDP increased in 2012-13 (RE) over 2011-12. A higher own revenue-GDP ratio was due to increase in both OTR and own non-tax revenue as ratios to GDP in 2012-13. “While states' OTR-GDP ratios recorded an increase primarily due to increased collections under 'stamp and registration fee', VAT and state excise, the increase in states' ONTR-GDP ratio was due to higher receipts from general services, education, sports and art and culture. Current transfers from the Centre as a ratio to GDP also improved following an increase in the share of central taxes and an increase in grants to finance state plan schemes,” the RBI report said. Sales tax collections from petroleum products that account for around 30% of the total VAT/sales tax collections also boosted states' OTRs in 2012-13.