GST support: Some states get central compensation despite revenue growth

  • 04-Mar-2019
  • GST support: Some states get central compensation despite revenue growth

The formula for compensating the state governments for their goods and services tax (GST) revenue shortfall is proving to be quite liberal, with many states that have reported big jumps in revenue growth this fiscal continuing to be eligible for the succour.

Bihar’s monthly average GST collection grew nearly 50% year-on-year this fiscal but it has still received a compensation of about `2,000 crore in April-December period; similar are the cases of Madhya Pradesh, Rajasthan and West Bengal, among others (see chart).
Also, it is increasingly becoming clear that ‘consumer states’ report higher rates of growth in

GST collections than those known for their manufacturing industries. Had the GST not been launched and the state-level value-added tax (VAT) system continued, these states would not have achieved the current revenue growth rates, going by the historical trend.

According to GST compensation law, the states are guaranteed a revenue growth of 14% on the FY16 base.

Under this the monthly state GST (SGST) target for all states in FY18 was `42,979 crore and this is `48,999 crore for the current fiscal. The states with very high y-o-y revenue increases continue to receive compensation because in the first year of GST (FY18), the growth rates have been minimal or negative due to the initial glitches faced by the comprehensive indirect tax.

Most major states were reporting average own tax revenue (OTR) growth of below 10% during the FY 15-FY 17 period, the three years prior to GST’s launch, growing at an average of below 10% during FY15-FY17 period. (Of OTR, about 60% used to come from levies like state VAT, entry tax, octroi, purchase tax, luxury tax etc that are now subsumed in the GST).

While the GST revenue deficit for all states combined was 20% in the last fiscal, it halved in the April-December period this fiscal. “The expansion of the revenue base in every state consequent to the reasonable tax rates across the board now would take care of their revenue concerns possibly after a brief time lag,” Deloitte India partner MS Mani said.

In the eight months of FY18 when GST existed, states were given compensation of `48,178 crore to bridge the gap assured revenue and actual collections. For the current fiscal, `48,202 crore has been disbursed to states for the April-December period as compensation.

The GST is now helping the consumption-led states to report revenue growth much higher than manufacturing states. “This is probably a result of better compliance in states that have traditionally lagged in infrastructure to enforce and collect taxes,” AMRG & Associates partner Rajat Mohan said.

“The structure adopted for GST was intended to move revenues from manufacturing states as it was a destination-based consumption tax and this would become more prominent in future as consuming states grow their markets further,” Mani said.

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