Lockdown effect: States’ tax receipts shrink nearly 80% in April, May could be worse

By: , and |
Published: May 4, 2020 12:40:40 AM

State governments seem to have collected the lowest-ever inflation-adjusted monthly tax revenue in April.

Supposing the buoyancy in FY21 to be 0.5, the same level as in FY20, and nominal GDP growth at 8%, the shortfall from the budgeted gross tax receipts in FY21would be a massive Rs 2.2 lakh crore.States’ own tax revenues (OTR) in the lockdown month were less than a fourth of the usual (estimated) level, with some putting the figure at even 10%.

State governments seem to have collected the lowest-ever inflation-adjusted monthly tax revenue in April. Officials from over half a dozen states told FE that their states’ own tax revenues (OTR) in the lockdown month were less than a fourth of the usual (estimated) level, with some putting the figure at even 10%.

While this has indeed undermined their ability to sustain the Covid-19-related additional expenditure, the Centre’s decision to release the states’ share of divisible tax pool without any reduction from the budgeted level has come as a solace to them. Of course, a clutch of them has resorted to front-loading of market borrowings and some with relatively worse balance sheets have borrowed at exorbitant costs.

The Centre has already transferred `46,038 crore to the states as their share of central taxes in April.
The states’ OTR could take a further hit in May, as the S-GST collections could be even worse than that in April. This is because April GST collections pertain largely to March, which saw the imposition of lockdown in the last week, whereas the May mop-up is primarily from transactions done in April, which witnessed lockdown throughout.

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 share in central taxes. With no/minimal activity since lockdown began on March 24, OTRs have dried up. 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.

“There is a collapse of state finances. With the battle against Covid-19 going on, the Centre should opt for additional borrowings or borrow from the Reserve Bank of India (to monetise its fiscal deficit) and make money available to the states,” Kerala finance minister TM Thomas Isaac told FE. The state has collected only about `200 crore or a measly 6% of the target of `3,500 crore its monthly OTR target in April. Against S-GST of `1,766 crore collected in April 2019, the collection during April 2020 was just `161 crore, he later wrote in a Facebook blog. Weak revenues forced the state to use up 91% of its Q1FY21 market borrowing quota of `6,500 crore in the first instance of state development loan (SDL) auction on April 7.

Bihar deputy chief minister Sushil Kumar Modi said that with a limited scope to mobilise revenues, the state’s fiscal deficit could touch 4% of GSDP in FY21 against the 3% target. He said Bihar’s OTR, including S-GST in April, would be about 20% of the collections a year ago. “It is hard to see how we can raise taxes once the pandemic is over as businesses would need more support and higher taxation would defeat the purpose of revival,” Modi said.

Several state chief ministers, including Chattisgarh’s Bhupesh Baghel, have demanded that the FRBM-mandated fiscal deficit ceiling be raised from 3% of GSDP to 5% for FY21 to enable them to borrow more funds. As per state budgets, their combined fiscal deficit stood at 2.4% of GSDP in FY19, the target (BE) for FY20 was 2.6% (actuals to be higher) and FY21 may turn out to be one of the worst in this regard.

Uttar Pradesh, the most populous state of the country, could collect only 15% of the `13,591 crore estimated in April. “We are trying to devise some strategy to prioritise spending,” a senior Uttar Pradesh government official said, on condition of anonymity.

Odisha, a revenue-surplus state thanks to rich mineral resources, could garner only around `1,100 crore revenue (around 20% of the target for the month) in April, while its monthly fixed cost towards salaries, pension and interest is `3,000 crore. The Centre’s tax devolution of `2,100 crore for April helped the state. “After reviewing finances for Q1, we may approach the Centre for some relief, including relaxations in fiscal deficit limit,” Odisha finance secretary Ashok Meena said.

Himachal Pradesh netted only `40 crore revenue in April compared to `450 crore a year ago. Central tax devolution and revenue deficit grant enabled it to stay afloat. “We are now doing simulations on how to manage state finances if we don’t get budgeted revenues,” Himachal finance secretary Prabodh Saxena said.

While the Centre’s decision to adhere to the tax devolution as per Budget FY21 plan till January 2021 would come to the states’ aid, they are also acutely aware that the Centre will do adjustments of extra transfers in February-March.
For now, normal tax devolutions and the 60% hike in states’ ways and means advances (WMA) by the Reserve Bank of India have allowed at least some states to refrain from excessive front-loading of borrowings or resorting to other forms of costly fundraising.

Notwithstanding a massive tax revenue shortfall it is faced with, the Centre is learnt to have decided to stick to the practice of keeping the mandatory transfers to the states from the divisible pool at the same rate as budgeted for FY21, till the 10th instalment due in January.

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