Tax collection of States on recovery mode?

N Ramalingam/Santosh Kumar Dash | Updated on January 05, 2021 Published on January 04, 2021

Positive outlook: As the economy gradually gets back to normalcy, States’ revenue collections should rebound   -  istock

Compared with Q1, the 4 southern States have shown impressive upturn in GST, sales tax and excise duty mop-up in Q2

As the Covid-19 pandemic hit the States, they witnessed rising expenditure and tumbling revenue — the so-called ‘scissor effect’. The pandemic forced governments at the sub-national level to increase spending on health and welfare measures for the poor. On the other hand, economic activity came to a standstill due to the pandemic-induced lockdown of the economy.

As a consequence, revenue collection collapsed. The recently released RBI report, State Finances: A Study of Budgets of 2020-21, finds that revenue receipts of States declined by 21 per cent and revenue expenditure increased by 11.7 per cent in the first quarter of 2020-21.

As per the latest quarterly GDP estimate released by MOSPI (Ministry of Statistics and Programme Implementation), the fall in growth rate reduced from -23.9 per cent in Q1:2020-21 to -7.5 per cent during Q2:2020-21, showing signs of a V-shaped recovery. The Covid pandemic pushed economic activity down by 15.7 per cent in H1:2020-21 compared to the corresponding period of last year.

In this backdrop, a look now at the tax collection of the southern States — Karnataka, Kerala, Tamil Nadu, and Telangana. Andhra Pradesh was excluded from the analysis since the data show aberrated values for almost all the components of tax revenue. The data are taken from the Monthly Key Indicators of States from the Comptroller & Auditor General of India.

Since tax revenue constitutes 73 per cent of the revenue receipts of the four States, its recovery is crucial for State finances. While tax revenue collection in the first half of 2020-21 declined by 25 per cent, GDP growth fell by 15.7 per cent. While this suggests that recovery of tax revenue collection is still lagging behind GDP growth, analysis of quarterly data indicates that tax revenue collection is on the recovery path.

In Q1:2020-21, tax revenue shrank by 42.2 per cent, which is almost double the rate of contraction of GDP (-23.9 per cent). However, in Q2:2020-21, the four southern States, on average, suffered a tax revenue shrinkage of 9 per cent compared with GDP contraction of 7.5 per cent.

GST booster

GST is the most important item among various tax revenue components, contributing around 35 per cent of tax revenue to the exchequer of the southern States. It declined by 26 per cent during the first half of the current fiscal compared to the loss of GDP revenue by 15.7 per cent. Among the four States, Kerala suffered the worst revenue loss (33.1 per cent) compared to the previous year’s collection during the same period.

Similarly, the inter-quarter comparison of GST collection tells that, on average, these States have reduced loss in GST revenue from -44.3 per cent in Q1 to -9 per cent in Q2. This suggests that recovery in GST collection is in sync with GDP growth recovery. While Telangana has almost recovered, Tamil Nadu still records a loss of 13.5 per cent in Q2. Overall, the recovery in GST revenue captures the increase in economic activity after the gradual opening up of the economy.

Sales tax is the second most contributor to tax revenue of States (25 per cent). The average loss from sales tax for all the four States is 22 per cent during H1:2020-21 compared to H1:2019-20. The trend of the quarterly collection reveals that while the southern States suffered a loss of revenue by 48.9 per cent in Q1:2020-21, they have recorded a positive growth of 1.5 per cent in Q2:2020-21. While Kerala witnessed the worst shrinkage (61.3 per cent) in Q1, sales tax collection in Telangana grew by 17.6 per cent in Q2.

Nearly about 15 per cent of tax revenue comes from State’s share of Central taxes in H1:2020-21. This component consists of the State’s share of union taxes and duties such as corporation tax, taxes on income other than corporation tax, wealth tax, customs duty, excise duty, and service tax (but does not include the State’s share of GST which is included in the GST revenue).

This revenue saw a decline of 32 per cent in H1:2020-21 for the four southern States. As a matter of serious concern for States, the decline in the State’s share of union taxes increased from -14.6 per cent in Q1 to -40.6 per cent in Q2. Kerala and Karnataka were the biggest losers (-38 per cent) during the first half-yearly period of 2020-21.

Duty from country spirits, foreign liquors, and spirits are the major sub-components under State excise duties. State excise contributed around 13 per cent to the total tax revenue of the southern States in H1:2020-21. This tax has seen a full recovery: -25.6 per cent in Q1 to 28.6 per cent in Q2. This surge can be attributed to the rise in tax rates of petroleum products, tobacco, and alcohol products. Telangana is the best performer among the four States in both quarters.

Rebound in realty sector

The share of Stamps and Registration Fees (SRF) is around 6 per cent of the tax revenue. In the first half of 2020-21, this contributed 36.7 per cent less revenue to the state exchequer compared to the first half of last fiscal. While the SRF collection of the southern States tanked by 58 per cent in the first quarter, it moderated to 15 per cent in the second quarter, showing a stronger recovery. This perhaps reflects that the real estate sector has started recovering from the onslaught of the pandemic. Tamil Nadu has recovered the most among southern states.

Other taxes and duties include taxes on agricultural income, on immovable property other than agricultural income tax, on vehicles, on goods and passengers, and duties on electricity. The share of this tax in total tax revenue collection is around 5 per cent. Among all the components of tax revenue, this suffered the most: -41 per cent in H1:2020-21, -61 per cent in Q1:2020-21, and -17.6 per cent in Q2:2020-21.

In the first quarter of the current fiscal, India witnessed an unprecedented economic recession which was followed by a better-than-expected economic recovery in the second quarter. The analysis of seven components of tax revenue collections of the four southern States depicts that States have shown impressive recovery in GST, sales tax, and excise duties.

The revenue from States’ share of union taxes, and other taxes and duties continue to significantly fall in the second quarter. As the economy gradually gets back to normalcy, one hopes that States’ revenue collection will peak up in tandem with recovery in the economic activity in the second half of 2020-21.

The writers are Associate Professor and Assistant Professor, respectively, at Gulati Institute of Finance and Taxation, Thiruvananthapuram.

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Published on January 04, 2021
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