11 states to require GST compensation of Rs 9,500 cr in FY18: India Ratings

States will get full compensation for the first five years of GST roll-out

India Ratings expects that 11 states will require compensation of Rs 9,500 crore under the goods and services tax (GST) regime in the current financial year, subject to certain assumptions. 

The sum is much less than the generally perceived Rs 50,000 crore. 

India Ratings’ Chief Economist Devendra Pant says GST revenues of all states combined will grow at a compound annual growth rate (CAGR) of 16.6 per cent in FY18 over FY16. 

The situation varies at the state level. Andhra Pradesh, Chhattisgarh, Gujarat, Himachal Pradesh, Madhya Pradesh, Odisha, Punjab and Tamil Nadu might need compensation from the Centre for any revenue loss under the baseline scenario. "This would cost the central government Rs 5,600 crore in FY18," Pant says.

Ind-Ra’s calculation shows the growth of GST component of states’ own tax revenue for all states in such a case would drop to 15.5 per cent in FY18 (base line scenario 16.6 per cent). Goa, Jammu and Kashmir and Jharkhand would also require compensation from the central government. The total compensation amount, therefore, would increase to Rs 9,500 crore in FY18. "This is based on the assumption that in the final production of goods and services, service tax accounts for 10 per cent.” 

The GST Council has imposed cess on aerated drinks, luxury cars and sin goods over the peak rate of 28 per cent, to fund the compensation part to states. The states will get full compensation for the first five years of the GST roll out, which means till 2021-22.

Overall, Ind-Ra says the GST implementation will have a positive impact on state governments’ finances in the medium to long term. Even in the short term, the impact on aggregate state finances will be positive but Ind-Ra’s calculation shows that the picture varies across states.