Overall revenue of India's top 17 states, which account for 85-90% of aggregate gross state domestic product, is likely to grow at a moderate pace of 7-9% this fiscal, after galloping around 25% last fiscal, according to ratings agency CRISIL.
Last fiscal growth was however on a flattish base of fiscal 2021, due to slowdown in the economy, caused by the Covid-19 pandemic.
Healthy tax buoyancy will support revenue growth, with Goods and Services Tax (GST) collections and devolutions from the Centre - together comprising 43-45% of the states' revenue - expected to show robust double-digit growth this fiscal, says CRISIL.
Growth from buoyant GST collections, will however, be somewhat moderated by flattish or low single digit growth in sales tax collections from petroleum products (8-9% of total revenue) and grants recommended by the Fifteenth Finance Commission (13-15%), it adds.
The biggest impetus to revenue growth will come from aggregate state GST collections which had already rebounded around 29% on-year last fiscal, says Anuj Sethi, senior director, CRISIL Ratings. "We expect this momentum to sustain and collections to further increase around 20% this fiscal, supported by better compliance levels, higher inflationary environment and steady economic growth," adds Sethi.
In addition, the share of states in central taxes is expected to grow further. While the proportions are determined by the Finance Commission, the overall kitty is linked with the central government’s gross tax collections. This pool, which expanded around 40% last fiscal, should further grow around 15% this fiscal.
On the other hand, fuel collections for states from sales tax on motor fuel are expected to remain almost range bound. That's because the effects of an expected 25% on-year increase in crude price in the current fiscal and better sales volumes would be offset by the reduction in central excise on petrol and diesel in November 2021 and May 2022, followed by a reduction in sales tax rates by some states.
"Fiscals 2021 and 2022 saw a significant shortfall in both GST and GST cess collections, due to the pandemic. This led the Centre to raise GST compensation loans in these two years, which was provided to states to help support their revenues. These revenue streams will not be available henceforth as per the Act’s provisions," says Aditya Jhaver, director, CRISIL Ratings.
According to India Ratings & Research, GST is unlikely to boost tax revenues of states as the average state GST growth during financial years 2017-18 to FY21 has been lower than the growth seen during FY14-FY17 when the taxes subsumed under GST.