States’ tax revenue growth slows down, could force Centre to hike cess
Between 2005 and 2015, only five of the 18 states recorded annual tax revenue growth rates of less than 14%. But between 2012 and 2015, 16 of 18 states were below the threshold.Updated: Feb 05, 2018 13:27 IST
The Centre may have to shell out more money than initially expected to compensate states for shortfalls in tax revenue after the implementation of the Goods and Services Tax, according to a study released this week. And, to raise the money needed to compensate the states, the Centre may have to impose a cess on a variety of goods, including motor vehicles, tobacco, and aerated drinks like Coke and Pepsi.
Under the GST agreement – the unified tax came into effect from July 1 2017 – the Centre guaranteed states that their tax revenues would grow at 14% per year. States that fell short would be eligible for compensation for five years after implementing GST.
New figures indicate that states’ tax revenue growth may have slowed more than initially expected. A new study, released Wednesday by the non-partisan think tank PRS Legislative Research, found that tax revenue of states grew at an annual rate of 9% between 2012 and 2015, “much lower” than the growth rate between 2005 and 2015.
“If this trend continues, then even the states with higher economic activity such as Tamil Nadu, Maharashtra, and Gujarat may need compensation,” said Vatsal Khullar, an analyst at PRS Legislative Research.
Between 2005 and 2015, only five of the 18 states recorded annual tax revenue growth rates of less than 14%. But between 2012 and 2015, 16 of 18 states were below the threshold.
Even at the time the GST was passed, it was recognised that many states were likely to fall short of the 14% annual growth rate.
“The basic thing is that 14% is way too high, and that is basically because the states were able to bargain together to make the centre compensate 14%,” said Dr M Govinda Rao, a member of the 14th Finance Commission and emeritus professor at the National Institute of Public Finance and Policy. “It’s basically bargaining between the union and the states. In order for the states to get on board, the union was willing to go that far.”
To prepare to make up the difference, the government created a GST Compensation Fund. In the event the fund should require more money, the centre gave itself the power to levy a cess on certain items, on top of the tax rates set forth in the GST.
The Gazette of India from last April 12 included a list of which goods are subject to additional cesses to compensate the states. Certain specific non-essential items are listed: pan, tobacco, coal, and motor vehicles.
The list concludes with a final item, “Any other supplies”, which may be subject to a 15% cess. That raises the possibility that other goods and services, in addition to the luxury goods listed explicitly, could become more expensive, should the centre need to raise more money for the compensation fund.
It is unclear whether the growth figures from 2012 to 2015 will prove to be more predictive of the future than the figures from 2005 to 2015. “Usually, for making predictions, you don’t take a short-term growth estimate. You take a fairly medium to long-term growth estimate,” Rao said.
Yet the immediate past, in which inflation was low and tax revenue growth was slow, may be more predictive of the immediate future than the remote past, a period marked by greater overall growth.