The Centre’s proposed Goods and Services Tax (GST) rejig will have a bigger impact on certain states with higher reliance on GST as part of their own tax revenue (OTR).
Businessline analysis of the State Budgets of the top 15 states ranked according to GSDP shows that 12 out of the 15 larger States derive over 40 per cent of their own tax revenue from state GST. In Bihar, which tops the list, GST contributes to 57.1 per cent of its OTR, followed by Gujarat at 50.8 per cent, Haryana at 45.6 per cent, Maharashtra (45.4 per cent) and Rajasthan (44.6 per cent).
Debt burden
Further, a reduction in GST collections due to a cut in certain slabs will particularly hurt States that run large deficits and have accumulated a lot of debt. For instance, Punjab, which gets 43.7 per cent revenue from GST, will find it difficult to make up for the reduction given its high debt to GSDP ratio of 44.5 per cent. West Bengal and Bihar are other states with large debt and weak fiscal position, which will feel the pinch of reduced GST collections more.
15 States were taken for this analysis on the basis of their GSDP. Delhi, a union territory, gets about 60 per cent of its own tax revenue from SGST.
While consumers are set to benefit from the reduction in rates, State government revenues are set to contract. As per recent research by SBI, the proposed rationalisation involving merging and cutting rates is expected to push the effective weighted average tax rate from 14.4 per cent in May 2017 down to 9.5 per cent in FY26.
Madhavi Arora, chief economist, Emkay Global, said that with the Centre needing states’ approval to pass this reform (via GST Council), the government “may propose sharing of any new cess (sin or clean energy) with the states, and improve its devolution under the Finance Commission recommendations to sweeten the deal.” We also have to consider the split of the residual cess fund after the expiry of compensation cess in Mar 2026, she added.
State concerns
Some states, too, have already voiced their concerns about the rationalisation plan. TN Finance Minister Thangam Thennarasu, in a recent statement, said that the simultaneous reduction of GST rates and phasing out of compensatory cess is likely to “significantly affect” States’ revenue. “The compensatory cess should be fully given to the states to compensate for the revenue loss for a period of 4 to 6 years and as an immediate measure, to compensate for the revenue loss, the net borrowing ceiling of the States should be raised to 4 per cent of the GDP without any conditions,” he said.
