BS analysis: States' own tax revenues show slight increase in tax buoyancy

The own tax revenues of states have risen only marginally from 7% of GSDP in 2011-12 to 7.1% in 2018-19

Over the past few weeks, several state governments have presented their Budgets for 2018-19. A Business Standard analysis of 10 state Budgets throws up some salient points. 

First, at the aggregate level, states’ own tax revenues - as a percentage of gross state domestic product (GSDP) - have barely registered a rise over the seven-year period from 2011-12 to 2018-19, indicating a marginal increase in tax buoyancy. A similar trend is observed in states’ non-tax revenues as well.

Second, these states have seen a sharp rise in their share in central taxes as well as grants from the Centre as a percentage of GSDP. Presumably, this is due to greater transfers to states after the 14th Finance Commission and on account of greater buoyancy in the Centre’s tax revenues. 

Third, most of these states are not projecting significant reductions in either their fiscal deficits or their debt levels till 2020-21. 

This is only a preliminary analysis. The complete picture will emerge once all state governments present their Budgets. The 10 state Budgets analysed are Chhattisgarh, Kerala, Jammu & Kashmir (J&K), Rajasthan, Uttar Pradesh, Bihar, Madhya Pradesh (MP), Karnataka, Maharashtra, and Haryana.

At the aggregate level, states’ revenue receipts are budgeted to increase from 13.6 per cent of GSDP in 2011-12 to 16 per cent in 2018-19 (Budget Estimates, or BE). It was 15.7 per cent in 2017-18 (Revised Estimates or RE).

Under the broad rubric of revenue receipts, the own tax revenues of these states have risen only marginally from 7 per cent of GSDP in 2011-12 to 7.1 per cent in 2018-19, implying little increase in tax buoyancy.  

There are several possible explanations for this trend.

“States’ tax revenues are typically derived from consumption activities. The patterns related to the latter have been affected to some extent in recent years because of events such as the ban on selling liquor near highways, prohibition announced by some states, and demonetisation. Additionally, some states have reduced value-added tax on fuels to temper prices. Such factors have had an impact on the pace of growth of states’ own tax revenues,” says Aditi Nayar, principal economist at Icra. Then there is also the slowdown in the real estate sector, which would have affected states’ stamp duty collections. 

Some states such as J&K, Chhattisgarh have seen greater buoyancy in own tax revenues over this period. But others like MP and Karnataka have seen their tax-to-GSDP ratios decline. For instance, MP’s own tax revenues have dipped from 8.5 per cent of GSDP in FY12 to 6.6 per cent in FY19 (BE). 

The trend in non-tax revenue collections is similar across both the states and the central government. States’ non-tax revenue collection remained at 1.2 per cent of GSDP in FY12 and FY18 (RE). In FY19 (BE), they are pegged to rise marginally to 1.4 per cent. Similarly, the Centre’s non-tax revenue has also remained at 1.4 per cent of GDP over the period. In FY19, it is projected at 1.3 per cent of GDP.

On the other hand, states’ share in central taxes has risen from 3.4 per cent of GSDP in FY12 to 4.6 per cent in FY19 (BE). Similarly, grants from the Centre have risen from 2 per cent of GSDP in FY12 to 2.9 per cent in FY19 (BE). These numbers imply that of the 2.4 percentage point increase in states’ revenue receipts from FY12 to FY19 (BE), 2.1 percentage points is due to higher transfers from the Centre. 

Part of this can be traced to higher transfers to states under the 14th Finance Commission. In its report, the commission had projected the total transfers to states to rise from 61.88 per cent of the divisible tax pool in FY15 to 62.75 in FY16 and further to 63.66 in FY19. These transfers include states’ share in taxes, Finance Commission grants as well as other grants. 

In addition, greater buoyancy in the Centre’s tax revenues, which would increase the divisible tax pool, would have also led to higher transfers (in absolute terms) to states, thereby increasing their transfers-to-GSDP ratio. As the Economic Survey 2017-18 noted, various government measures have increased personal income tax (I-T) collections substantially. “The sum of all government efforts increased I-T collections thus far between Rs 650 billion and Rs 900 billion (over 2016-17 and 2017-18),” it said. 

On the fiscal front, there is a reason to worry. 

Most of these states, for which the fiscal road map is available, have not projected substantial reductions in either their fiscal deficit or their debt levels. 

For instance, Haryana has projected its deficit to rise to 3 per cent in 2020-21, up from 2.8 per cent in 2018-19 (BE). Its debt-to-GSDP ratio is expected to rise from 23.44 per cent in 2018-19 (BE) to 25 per cent in 2020-21.

Similarly, MP expects its deficit to slip to 3.3 per cent in 2020-21, up from 3.2 per cent in 2018-19 (BE). Its debt is expected to rise from 26.3 per cent to 27.2 per cent over the same period. A similar trend is observed in states of Bihar, Chhattisgarh, and Karnataka. The only exception being Kerala, which expects a marginal reduction in both fiscal deficit and debt-to-GSDP ratio.