High tax buoyancy, led primarily by fuel taxes, and increase in grants from the Centre under the Finance Commission package will help revenue growth of states cross the pre-pandemic level in the current fiscal, provided there is no third COVID wav
High tax buoyancy, led primarily by fuel taxes, and increase in grants from the Centre under the Finance Commission package will help revenue growth of states cross the pre-pandemic level in the current fiscal, provided there is no third COVID wave, according to a report. Given the higher prices of fuels, revenue from this segment is set to grow 50 per cent to 30 per cent in the current financial year from 20 per cent it clipped last fiscal, even though the overall volume will fall, Crisil said in a report on Thursday.
The tax on fuels constitute 10 per cent of the revenues of states. Revenue of the top 10 states had plunged 600 basis points (bps) last fiscal but is set to exceed the pre-pandemic level this financial year, driven by higher tax buoyancy, rise in sales tax collections from petroleum products coupled with increase in grants following 15th Finance Commission recommendations, it said.
The assessment is based on projections for 10 large states — Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, and Kerala — which account for almost 70 per cent of the aggregate gross state domestic product. The key revenue components of the states are central taxes (25 per cent), state GST (21 per cent,) central grants (17 per cent), sales tax from petrol and alcohol (13 per cent). Non-tax revenues, excise duty, stamp duty and others make up the rest.
It can be noted that despite petrol crossing theRs 100 mark in many states and also diesel in some places, the Centre and the states have not lowered the taxes on these fuels. In fact, almost 65 per cent of the retail prices of these fuels are made up of VAT as petroleum products are not under the GST.
Aggregate Goods and Services Tax (GST) collections, which account for a fifth of the states’ revenues, have recovered well in the fourth quarter of FY21 as economic activity sprung back. The momentum continues this fiscal, with April and May collections averaging Rs 0.93 lakh crore (April being the highest ever at Rs 1.41 lakh crore), marking an 11 per cent growth over fiscal 2020 so far, it said.
While the second wave of the pandemic may moderate GST collections in June and July, Crisil said it expects a recovery in GST mop up to the pre-pandemic levels by August. Following its parent S&P Ratings cutting the GDP forecast earlier in the day to 9.5 per cent, Crisil also slashed its growth forecast to 9.5 per cent. Another factor that will provide a fillip to the states’ revenues is sales tax. The price of crude has jumped to USD 70 a barrel from USD 60 on average in fiscal 2020, leading to higher petrol and diesel prices.
That combined with the Rs 10-13 per litre increase in central excise duty imposed last year will increase the taxable value of fuel for levy of sales tax, which accounts for 10 per cent of states’ revenues, the report said. Most of these 10 states had hiked sales tax on fuel sales by 6-7 per cent or Rs 1.5-1.8 a litre last fiscal. Consequently, the agency expects sales tax revenue for the states to increase 30 per cent this fiscal from fiscal 20 levels, even as fuel volume remains 2-3 per cent lower than the pre-pandemic levels. Crude price is likely to average USD 70 per barrel this fiscal.
In addition to own taxes, the states have a share of the central taxes, which forms a quarter of their overall revenues. While the proportions are determined by the Finance Commission, the overall kitty is linked with GDP growth. This kitty, which declined 9 per cent last fiscal, should recover to pre-pandemic levels with a growth of 9-10 per cent this fiscal, in line with the Union Budget.
States are also dependent on various grants provided by the Centre, including grants towards centrally-sponsored schemes, the Finance Commission grants, GST compensation, and revenue deficit. Despite muted economic activity, these grants grew 10 per cent last fiscal on the Finance Commission stipulations, and are seen robust this fiscal as well, as per the report.
Further, the report said that while overall revenue may grow 600 bps over fiscal 2020, they will still lag the budget estimates of states by a good 17 per cent. That’s because most states didn’t factor in the impact of the second wave and have pencilled in way higher tax buoyancy. If a more intense third wave hits the country, leading to a re-imposition of stringent lockdown, the projections could be revised downwards. Crisil said.