Covid-19 lockdown effect: Own tax receipts of states improve, yet 25-50% of normal range

By: and |
June 8, 2020 2:10 AM

Resumption of various economic activities after the easing of the lockdown restrictions and hikes in state excise duties on liquor aided the slow recovery.

Since April, at least 20 states, including Uttar Pradesh, Tamil Nadu, Karnataka, Rajasthan, West Bengal, Odisha and Kerala have increased the excise duties on liquor by 10-75%. Since April, at least 20 states, including Uttar Pradesh, Tamil Nadu, Karnataka, Rajasthan, West Bengal, Odisha and Kerala have increased the excise duties on liquor by 10-75%.

The own tax revenues (OTRs) of most state governments more than doubled in May from the April trough, but were still in the range of 25-50% of the normal, information gathered by FE from several states and anecdotal evidence suggest.

Resumption of various economic activities after the easing of the lockdown restrictions and hikes in state excise duties on liquor aided the slow recovery.

Since April, at least 20 states, including Uttar Pradesh, Tamil Nadu, Karnataka, Rajasthan, West Bengal, Odisha and Kerala have increased the excise duties on liquor by 10-75%. Also, state goods and services tax (S-GST) collections rose significantly from the all-time low in April, as indicated by the increase in e-way bill generation on the GSTN portal, from an average of 2.9 lakh per day in April to 8.2 lakh per day in May.

But the states are far from out of the woods yet. Despite the Centre having already transferred Rs 92,076 crore, almost double the taxes it collected in April-May, to the states as their share of the divisible pool of central taxes, states’ market borrowings in aggregate more than doubled to Rs 1.26 lakh crore in the June quarter from the year-ago level.

A senior official from the Uttar Pradesh government told FE that the country’s most populous state collected Rs 5,820 crore or 41% of the budgeted monthly OTR target of Rs 14,190 crore in May compared with just about Rs 2,040 crore or 15% of the target collected in April.

“With the lockdown being lifted or eased in more places, we expect the revenue collections to inch closer to monthly target in June,” the official said.

According to Rajesh Kumar Singh, Kerala’s additional chief secretary (finance), the state’s own tax revenue collections in May were about 43% of the monthly average in normal times. This is a significant improvement from the April level when just 6% of the monthly OTR target was collected. The southern state used up 91% of its Q1FY21 market borrowing quota of Rs 6,500 crore in the very first instance of state development loan (SDL) auction on April 7.

Chhattisgarh’s own tax revenue improved from about 30% of monthly target in April to 50% in May, aided by an increase in excise on liquor (the state raised taxes on liquor as well as introduced home delivery of liquor to raise consumption) and land registration fees. “We will take a call on whether to borrow more, after evaluating the rate of improvement in own revenue mobilisation in the coming months,” a senior Chhattisgarh finance ministry official said. The state has slashed capex, with such spending being largely restricted to a few ongoing public-works and irrigation projects and this norm, according to the official, will continue till revenues improve.

Odisha, which garnered about 20% of monthly revenue targeted for April, collected 25% of the target in May, the state’s finance secretary Ashok Meena said. While the transfers from the Cengre indeed came in handy for the state, it too has curbed capital expenditure, in its efforts to find resources for Covid-19 management. Himachal Pradesh, which reported 10% of targeted revenue collections in April, also saw an improvement in May, the state finance secretary Prabodh Saxena confirmed, but added that the collections were still way behind the normal level.

Most state governments raised value-added taxes on auto fuels and excise on liquor in an attempt to cushion the body blow to their revenues dealt by the Covid-19 pandemic. Among others, Uttar Pradesh, Kerala, Chhattisgarh, Andhra Pradesh and Odisha have increased value added tax/sales tax on these fuels by rates that correspond to retail price increases ranging from Rs 1-6 per litre for petrol and Rs 0.5-5 per litre for diesel.

The steep hikes on auto fuel taxes – Rs 10 per litre on petrol and Rs 13 per litre on diesel – announced by the Centre on May 5 could fetch states some Rs 20,000 crore of the extra central revenue, given that part of the duty hikes are in the shareable pool; the states would also get a few thousand crores extra due to the resultant expansion of the base their taxes (VAT/sales tax) apply.

In response to requests made by several chief ministers, the Centre recently raised the borrowing limit for the states to 5% of their respective gross state domestic product (GSDP) from 3% earlier, in a move that could theoretically make available an additional Rs 4.28 lakh crore to all states combined, if the facility is fully used up. Of course, all states may not be able to fully use the facility, given that only 0.5% of GSDP is available to them unconditionally, and the balance is linked to certain conditions of reforms in four critical areas. “The increase in the ways and means advances limit of states and the subsequent availability of short term funds from the Reserve Bank of India could help lower the market borrowings of states,” CARE Ratings said.

Though the states’ dependence on OTR and transfers from the Centre vary widely among states, in the aggregate, OTR constitutes 62% of states’ tax revenue and the balance 38% come from the share in central taxes. State GST is roughly 43.5% of OTR (around 30% of total tax revenue), while other major OTR components are sales tax/VAT on petroleum, state excise on alcohol and proceeds from stamp duty registration fees.

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