India Ratings and Research (Ind-Ra) in its latest report has said that a new nationwide goods and services tax (GST) rollout will have positive impact on state governments’ finances in the medium to long term. Even in the short term, it said that the impact on aggregate state finances will be positive but the picture varies across states.
Under the new tax regime, the ratings agency is expecting that revenues of all states combined will grow at a compound annual growth rate (CAGR) of 16.6% in FY18 over FY16. However, it said that since the picture at the individual state level differs, eight states namely Andhra Pradesh, Chhattisgarh, Gujarat, Himachal Pradesh, Madhya Pradesh, Odisha, Punjab and Tamil Nadu would require compensation from the central government for any revenue loss under baseline scenario. Post rollout of GST, it showed that input tax credit is available on both goods and services. It also expects that the growth of GST component of states’ own tax revenue for all states in such a case to drop to 15.5 percent in FY18 and three more states namely, Goa, Jammu and Kashmir and Jharkhand would require compensation from the central government.
Therefore, the report noted that the total compensation amount would rise to Rs 95 billion in the financial year 2017-18. It explained that this is based on the assumption that in the final production of goods and services, service tax accounts for 10 percent. To be able to absorb the positive impact of GST on state finances, Ind-Ra believes that states will have to keep a constant vigil on the buoyancy of taxes that are outside the purview of GST as also their own non-tax revenue.