Tax cuts to impact revenue collection of States, says RBI report

Surabhi Mumbai | Updated on October 08, 2019 Published on October 03, 2019

RBI report says tax cuts will impact revenue collection of States.   -

RBI’s annual report gives comprehensive data on on the fiscal health of states


Revenue trends for States seem to be stabilising after initial volatility in the goods and services tax (GST) and now seem to be on the rise. However, a recent report by the Reserve Bank of India has said that except for a few states, the desired results from the new indirect tax levy are still elusive.

Increasing collections from the levy is also essential as the recent cuts in corporate tax and GST will boost investment but could also lead to a revenue loss for States this fiscal, the RBI report on State Finances: A Study of Budgets of 2019-20 noted.

Read more: Finance Minister unleashes corporate ‘animal spirits’

Also read: Hotel tariffs, outdoor catering get GST rate cuts

GST collections have already dipped to a 19-month low of ₹91,916 crore in September due to the current economic slowdown.

Related news: At ₹92,000 crore, GST mop-up in September dives to a 19-month low

The effective weighted GST rate is now at 11.6 per cent from 14.4 per cent when the tax system was launched, it noted. The indirect tax levy accounts for nearly 50 per cent of the revenue for States and about 37 per cent for the Centre.

“Barring a few states, however, the desired GST targets have proved elusive so far warranting compensation cess in the first two years of implementation,” the report said, adding that “concerted efforts must be taken to improve revenue by plugging loopholes and mitigating IT glitches.

Call to subsume alcohol and fuel levy

The report has also noted that the challenge is to subsume alcohol and petroleum dutied under GST while maintaining revenue neutrality as well as their importance in maintaining and rationalising States' debt.

 “Currently, alcohol and petroleum are still out of the purview of GST. For a majority of the states, however, the sales tax on petroleum forms about 15-20 per cent of own tax revenue, while excise duty on alcohol accounts for around 10-15 per cent..The challenge is to subsume these two major sources of revenue under GST while maintaining revenue neutrality, keeping in view its relevance to maintaining and rationalising states’ debt.”

The annual study is considered to be one of the most comprehensive reports on the fiscal health of States.

In 2017-18, when GST was introduced from July 1, collections from the tax amounted to 26.3 per cent of the States’ own revenue receipts, which rose to 35.3 per cent in the Revised Estimates for 2018-19 and just a notch lower at 35.4 per cent in the Budget estimates for the current fiscal year.

However, according to the report, the GST compensation cess has risen from 2.6 per cent in 2017-18 to 4.1 per cent in 2018-19 (RE) and is estimated to be at 4.5 per cent this fiscal.

Kerala Finance Minister Thomas Isaac had recently noted that the current low in GST collections is not only due to the economic slowdown but also the “mess in GST administration”. “What compliance can you expect when even the first annual return is yet to be filed? And also rates have been continuously slashed to less than revenue-neutral levels,” he said in a tweet.

Published on October 03, 2019
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