Why there are fears that state revenue will fall behind the estimates?

It has been feared that the tax revenues for state governments are likely to fall well short of their budget estimates for 2019-20.

State Revenue Sources

Own tax revenues and devolution of central taxes are the two major components of the revenues earned by state governments. Tax revenues of the states are largely dominated by SGST. This is budgeted to account for over 40 per cent of the states’ own tax revenues in FY20.

The tax devolution to states is governed by the formulae prescribed by successive Finance Commissions and takes its cue from the actual collections of the central government.

Revenue Falling Short

GST Revenues

The budget estimates of State governments have estimated their SGST to expand by 11 per cent in FY20 (budget estimates) relative to their FY19 revised estimates. But the growth in headline GST collections was only 5 per cent in the first half of the financial year.

If the pace of growth of GST revenues doesn’t pick up (which is unlikely as India is witnessing an economic slow down) in the second half, SGST collections may trail what states had forecast by around Rs 350-400 billion.

GST compensation cess

GST Compensation Cess is an additional cess levied on certain notified goods in addition to GST applicable on it. It is levied to compensate the states for the revenue shortfall. The GST compensation cess collected in FY20 (April to September) has fallen short of the compensation released to the states this year.

Majority of the states continue to require compensation. This is becoming an acute concern as the five-year compensation period for GST losses will end in 2022.

Tax devolution from Centre

As per the recommendations of the Fourteenth Finance Commission, 42 per cent of the shareable Central taxes of the central government is being devolved to states for the period FY16-FY20.

The rate of growth of the Centre’s gross tax revenues stood at a subdued 4 per cent in April-August 2019. This was sharply lower than the target of 18 per cent enshrined in the budget estimates relative to the “provisional actuals”.

It is estimated that the gross tax revenues of the Centre are required to expand by a sharp 25 per cent in the remainder of this financial year to meet the budget estimates for FY20. This appears challenging given the subdued economic outlook as of now.

Corporate Tax Cut

The recent corporate tax cut announced would result in a revenue loss which the government has pegged at Rs 1.45 trillion. This burden is to be shared between the Centre and states.

Owing to all these factors the fear of state revenues falling short than expected is looming large.