When GST was launched manufacturing States had expressed concerns about its adverse revenue implications.
The Centre then assured to protect States against any revenue loss during an initial period of five years post implementation of GST. The formula for compensating States factored a compounded growth rate of 14 per cent on the respective base line revenue of States in 2015-16.
There was a dip in revenues during the pandemic for some States which eventually increased the compensation due to them. Despite the Centre’s constraints, it cleared the dues through borrowings subsequently. In February 2023, the Centre cleared provisional dues by disbursing about ₹16,982 crore to States.
Compensation cess has been extended till March 2026 to enable the Centre to recoup the amount disbursed to States through union exchequer. However, States will not get any share from the proceeds of the extended levy and are no longer have assured revenue protection.
States are constrained in raising revenue as decisions on tax rates are taken by the GST Council. Here are some revenue raising measures for States.
Revenue raising steps
States can formulate a tax analytics strategy and processes to gain insights from data collated with respect to revenue and establish deeper fact-based decision-making. Data analytics tools may be used to evaluate data collated from internal and external sources.
Information related to movement of goods can be reconciled with e-way bill reports and information received from road transport departments to detect red flags.
However, such reports should be used judiciously and intelligently. Reliance on such comparison should be limited as information disclosed as per GST laws and financial statements (ROC filings) or Income Tax filings, may not reconcile due to various reasons.
To tackle non-compliance, based on risk profiling and history of such taxpayers, it is important to curate policy measures for each category of taxpayer differently and take enforcement measures based on profile category of the taxpayer. Enforcement measures should be used for cases pertaining to circular trading or fraudulent invoicing.
Widening tax base
States may assess the service industry and the various activities within its fold in their respective states. This need arises on account of widening of taxpayer base of states as they have right to levy GST on services also for the first time.
In contrast to goods where typically, taxation is linked to movement of such goods, services are taxed as per specific rules. The valuation mechanism for different services is also quite elaborate. Capacity building initiatives may be taken up in this regard.
GST audits are being conducted for the first time by field officers. Sensitising field formations on ways to increase positive engagement with taxpayers, trade facilitation kiosks and drives to create awareness about laws and procedures will also lead to widening of taxpayer base and increased compliance. This would lead to positive engagement with taxpayers and build confidence amongst businesses.
States such as Rajasthan, Karnataka and Delhi have set up dedicated units/task forces with the aim to augment revenues. It is essential for States to foster the image of a business-friendly tax administration and ensure ease of doing business.
States should work in tandem with other States in the spirit of co-operative federalism, wherein each State seeks to tax consumption in their respective States only in accordance with the GST laws and avoid attempts to draw a territorial nexus with every transaction even though tax may have been paid in another State. This would go a long way in boosting taxpayer sentiments, increase compliance and thereby augment revenue for the states.
The writer is Partner, Deloitte India. Opinions expressed are personal. With inputs from Anupama Agrawal and Deekshant Gupta