States posted barely 8% revenue growth from relevant taxes in FY14-FY17 against 14% assured in GST regime
States are crying foul over delay in receipt of compensation from the Centre on the goods and services tax (GST) account and are also slashing capital expenditure due to the overall revenue shortfall, but they would have been worse off if the GST weren’t introduced. According to the data gathered by the GST Network and reviewed by FE, states had, between FY14-17, enjoyed an average annual revenue growth of only about 8% from those state-level taxes which later collapsed into GST.
Under the compensation mechanism that came into being along with GST in FY18 (July 2017), states are, however, guaranteed an annual revenue growth of 14% till FY22. This has clearly been proven a commitment too onerous for the Centre to meet, especially given the economic slowdown.
Overall GST collections, including the cess proceeds that go into the compensation kitty, grew just 4.3% during the April-December period in the current financial year. While the protected monthly revenue for the state in the current fiscal is Rs 55,900 crore, in the first nine months of the year, the average monthly state GST collection fell short by nearly Rs 7,300 crore.
Apart from economic slowdown, the series of rate reductions announced by the GST Council in response to the demands from sections of taxpayers too dented GST revenue. These steps brought down the composite GST rate to a level much below the revenue neutral level estimated.
Of course, it also seems that the authorities have failed to effectively curb tax evasion – reports suggest of a thriving racket of fake invoices and fraudulent use of input tax credits by sections of taxpayers to meet their tax liabilities.
While states are already clamouring for extension of the compensation regime beyond FY22, many experts, including 15th Finance Commission (FFC) chairman NK Singh, have cited the enormous fiscal burden such a move could impose on the Centre’s finances. In fact, Singh has advocated in the GST Council meeting held in Goa on December 18 that the extent of revenue protection for states could be rationalised by reducing the guaranteed revenue growth from 14%. This suggestion was however shot down by states.
Of course, states also bear the brunt of the lower-than-expected GST mop-up as it reduces their share from the divisible pool of taxes. It must also be noted that taxes subsumed in GST constitute about 42% of states’ own tax revenue (OTR) while only less than a quarter of the Centre’s gross tax receipts come from GST.
When the GST Council in its early days discussed the formula for guaranteed revenue growth to states, one of the options that came up was linking it with nominal GDP growth rate. However, some states, especially Kerala, objected to it saying that the revenue outcome of GDP growth rate was based on efficiency of collections.
The meeting eventually arrived at the 14% rate (with FY16 as the base) after the intervention of the then Union finance minister Arun Jaitley. “In a spirit of compromise, the Hon’ble Chairperson (Arun Jaitley) accepted the suggestion of calculating CST revenue at the rate of 2% and to a fixed annual growth rate of 14%. The Council reached a unanimous agreement on this proposal,” he had said as per the minutes of the meeting of the third Council meeting held in October 2016.
According to the minutes of the Council’s Goa meeting, Singh said there that, “While compensation to the states had been assured till 2022, the calculations by FFC had taken into account revenue growth of 14% for the remaining three years also. This will undoubtedly put a big burden on the Union’s finances. If the GST revenue of the states did not grow at the rate of 14% per annum on account of low tax buoyancy arising from lower efficiency gains then the Central and state governments had to worry about the certainty of the assured 14% compensation in case of shortfall.” He also observed that the gap in amount of realisation from the relevant cesses and the compensation to be paid also increased over a period of time.
The Central government’s latest estimate of the shortfall in compensation kitty for FY20 is a staggering Rs 63,000 crore. The state-level taxes subsumed in GST include state VAT, entertainment tax (other than those levied by local bodies), Sales Tax (that was levied by the Centre but appropriated by states), octroi and entry tax, purchase tax, taxes on lottery, betting and gambling as also state cesses and surcharges relating to supply of goods and services. The other OTR items of states are sales taxes on petroleum, stamp duty and registration fee of properties, excise on alcohol etc.