Tax devolution to states to be 30% lower than Budget estimates: Icra study

The projected figure to be 16.2 per cent lower than even FY20 numbers

The aggregate central tax devolution to all states is pegged at Rs 5.5 trillion in FY21, 30.5 per cent lower than what the Union government had budgeted for this fiscal. The envisaged figure is also a contraction of 16.2 per cent relative to the amount transferred in 2019-20.

A study by ratings agency Icra notes that the expected cut in non-discretionary consumption and impact of the Covid-19 pandemic on corporate profitability, job losses and income levels will limit the Government of India’s (GoI) gross tax revenue to Rs 17 trillion. This is 30 per cent lower than Rs 24.2 trillion, the government’s Budget Estimate (BE) for FY21.

“In the ongoing fiscal, the tax collections of the GoI as well as of the state governments are expected to be considerably lower than the level forecast by them in their FY2021 budgets. This reflects the expected compression of consumption of several non-essential items during the period of the lockdown. Moreover, behavioural changes and economic uncertainty may delay the resumption of normal demand for discretionary goods and services even after the lockdown is lifted, which would continue to constrain tax collections”, the study said.

Quoting provisional data published by the Controller General of Accounts (CGA), the study by Icra says GoI transferred Rs 6.5 trillion as central tax devolution (CTD) in FY2020, 14.5 per cent lower than the Rs 7.6 trillion devolved in FY2019. Moreover, this is Rs 540 crore lower than the Rs 6.6 trillion included in the revised estimates for FY2020.

In the Union Budget for FY2021 presented on February 1, 2020, the GoI had indicated a 12.0 per cent year-on-year (y-o-y) growth in its gross tax revenues to Rs 24.2 trillion. This growth assumption appeared challenging even prior to the escalation of the Covid-19 crisis, and now seems exceedingly unlikely. Significantly lower-than budgeted gross tax revenues in FY2021, would imply a sharp downward revision in the CTD for this year relative to the budgeted level of Rs 7.8 trillion.

“The provisional data released by the CGA for April 2020 indicates that Rs 460 billion was transferred to the states as CTD in that month, 7.1 per cent lower than the amount of Rs 49,500 crore transferred in April 2019, even though the FY2021 BE for CTD is 19.5 per cent higher than the FY2020 RE (Revised Estimate) for the same. This suggests that the GoI may have already started to adjust the monthly CTD in FY2021 for the excess amount devolved in FY2020, especially since its gross tax collections in April 2020 were a steep 44.3 per cent lower than the level in April 2019”, the Icra report added