High State Revenue Deficits Calls for GST Slab Rationalisation

A new analysis has shed light on the state’s financial situation, emphasising the continuous budget revenue deficit. According to the research, this is resulting in capital outlay constraints, notably the allocation of cash to construct assets.

The research also emphasises the need to rationalise the goods and services tax (GST) slabs for the post-compensation period. The Union government refused to prolong the original GST compensation period, negatively impacting state revenues.

The GST was implemented on July 1, 2017, and the transition period ended on June 30, 2022, when the states were reimbursed for any revenue loss caused by the new tax regime’s installation. The difference between the predicted revenue based on a 14% annual growth rate using 2015-16 as the base year and the actual GST revenue was estimated.

According to the report, electricity subsidies account for roughly half of total public expenditure.

PRS Legislative Research, a non-profit independent research institute, released the report titled ‘State of State Finances’ on October 1 (Wednesday). It was written by Tushar Chakrabarty and Tanvi Vipra.

States continue to budget revenue deficit

A revenue deficit occurs when a state’s revenue is insufficient to pay its expected revenue expenditure, which includes salaries, pensions, and so on.

In other words, state governments continually spend more money than they generate from regular sources of income such as taxes, fees, and other revenue streams. Their expenses outnumber their earnings. This limits the ability to create assets.

According to the data, seven states have consistently reported a revenue deficit since 2015-16. Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal are among these states.

All recent Finance Commissions have proposed transfers to governments in order to bridge revenue gaps.

Over the next five years, from 2021-22 to 2025-26, the 15th Finance Commission has recommended revenue deficit grants of roughly Rs 2.95 lakh crore for 17 states. According to the report, almost 87% of the funds were received in the first three years. As a result, grants will be significantly smaller in the next two years, and states will need to supplement their revenue streams or decrease expenditures to preserve revenue balance.

Kerala received the largest portion of the Rs 4,749 crore revenue deficit grant. It will not receive any funding in 2023-24.

According to the research, 11 states have budgeted a revenue shortfall. Andhra Pradesh, Himachal Pradesh, Kerala, Punjab, and West Bengal are among the 11 states that have budgeted a revenue shortfall after accounting for revenue deficit grants in 2023-24. Six more states, including Assam, Nagaland, and Uttarakhand, would have been in revenue deficit in 2023-24 if grants had not been supplied.

It should be noted that the greatest source of money for states is their own tax collection.

In 2023-24, states are expected to raise 57% of their revenue from their own tax and non-tax sources, with the remaining 43% coming from the devolution of federal levies and grants from the Union government.

The report noted that states’ revenue expenditure is planned to be 83% of total spending in 2023-24, while capital outlay is budgeted to be 17%.

GST slabs should be rationalised

GST income collected by states has continually been less than the guaranteed revenue.

“This is because states’ aggregate GSDP has grown at a compounded rate of 9.6% between 2018-19 and 2022-23, lower than the 14% guaranteed growth rate,” according to the report.

When the GST was implemented in July 2017, states were guaranteed a revenue guarantee of 14% per year on GST revenue over the base year of 2015-16. However, few states had a pre-GST growth rate of subsumed taxes more than 14%, with the majority lying in the 5%-12% range.

States that could not meet this annual GST income growth target were paid until the end of June 2022. The states were compensated through the imposition of a GST compensation cess on certain products and services. However, the termination of the payout had an impact on their revenues.

Furthermore, the 15th Finance Commission found that the GST’s revenue neutrality was jeopardised as a result of multiple tax rate decreases.

In September 2021, the GST Council decided to form a Group of Ministers (GoM) to rationalise tax exemptions and correct the inverted duty structure (where the tax on finished or processed goods is lower than the tax on raw materials or intermediate products used to manufacture those finished goods).

The GST Council recommended many tax rate changes at its 47th meeting in order to remove exemptions and fix the inverted duty structure. However, according to the article, the improvements have yet to be implemented.

The 48th GST Council meeting, held on December 17, was a “disappointing affair” after five months because there was no correction of the inverted duty structure, an exercise that also resulted in rate rationalisation, according to Najib Shah, former chairman of the Central Board of Indirect Taxes and Customs.

“There was no attempt either to move towards the much-debated convergence of rates,” he went on to say.

According to the PRS research, “at present, SGST accounts for over 40% of states’ own tax revenue.”

As a result, GST slabs may need to be rationalised in order to generate greater revenue in the post-compensation period, according to the report.

Increasing subsidy spending

States are expected to spend 9% of their revenue on subsidies in 2022-23. These include power, health, education, and transportation.

According to the research, a significant percentage of the states’ budget goes into supplying subsidised power for agricultural, household, and industrial use.

“A large portion of the subsidy expenditure in 2021-22 went towards providing subsidised electricity.” Notably, in 2021-22, 97% of Rajasthan’s entire subsidy expenditure and 80% of Punjab and Bihar’s total subsidy expenditure went towards subsidising power,” it stated.

According to the International Monetary Fund (IMF), a significant share of the gains from these subsidies may predominantly benefit higher-income households.

PRS did a case study on the subsidy expenditure in Punjab. According to the report, the state’s subsidy expenditure as a percentage of revenue receipts has been extremely high. Subsidies accounted for 17% of Punjab’s revenue receipts between 2017-18 and 2021-22. Other states spent an average of 8%.