Domestic credit rating agency, ICRA in its latest report has said that the compensation law approved by the government for revenue losses related to the transition to the goods and services tax (GST) system will bring certainty to state budgeting. However, the report noted that the temporary disruption may be witnessed on account of transition to the GST and forecasted that the pace of growth of central transfers to state governments will halve in the coming fiscal.
The rating agency said that after the transition to the GST, the states' own revenues will increase by 14 per cent for the first five years, reducing the extent of uncertainty for budget preparation at the state level. On the same time, it projected decline in the pace of growth of central tax devolution to 10.9 per cent in FY2018- Budget Estimates from 20.1 per cent in FY2017- revised estimates, due to slowdown in the year-on-year growth of the excise duty and service tax collections.
ICRA stated that the GST on services accruing to the states on an aggregate basis will be twice as high as the share of service tax devolved to the state governments, on every Rs 100 of taxable services in the current regime. Moreover, compensation for losses by the centre would protect against any medium-term downside to the state governments’ revenues.