After recovering to half of normal, states’ tax revenue plateaus

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The own tax revenues (OTRs) of many state governments rose significantly in June from May, but were still in the range of 50-60% of the normal, information gathered by FE from some of the states and anecdotal evidence suggest.

A graded pick-up in various economic activities and the hikes in state excise duties on liquor aided the slow recovery. A pick-up in GST collections which recovered from a low of Rs 32,294 crore in April to Rs 62,009 crore in May and further to Rs 90,917 crore in June also contributed to the recovery. However, the scope of further improvement in collections in July is rather limited, given the last leg of the supply chain is the most difficult to be smoothened. Also, the reimposition of the lockdown restrictions in several key economic pockets due to the spurt in Covid-19 cases could impede the process of resumption of economic activities.

The alcohol excise revenue of Uttar Pradesh was about 77% of the budget target in June, up 59% of the target in from May and just 1.2% in April. Odisha met nearly 50% of its target on alcohol excise revenue in June, up from 4% in May. Since April, at least 20 states, including UP, Tamil Nadu, Karnataka, Rajasthan, West Bengal, Odisha and Kerala have hiked the excise duties on liquor by 10-75%.

But the states are far from out of the woods yet. Despite the Centre having already transferred Rs 1.34 lakh crore to the states in April-June, which is even more than its gross tax collections in the period, states’ market borrowings in aggregate more than doubled to Rs 1.7 lakh crore in the June quarter from the year-ago level. “This sharp rise in borrowings reflects the shock to the revenues of the state governments given the decline in the consumption of several non-essential goods and services that is expected to have taken place during the lockdown period,” rating agency Icra noted.

The Centre has tried to mitigate the state governments’ pain from an unmanageable revenue decline in Aril-May, by generously transferring almost double the gross amount it collected during the period to the states as their share of central taxes. However, this has proven to be unsustainable; June tax transfers to states are understood to be 9% less than the monthly transfer of Rs 46,083 crore in the April-May period, at around Rs 42,000 crore.

A senior official from the Uttar Pradesh government told FE that the state collected Rs 8,849 crore or 61% of the budgeted monthly OTR target of Rs 14,447 crore in June compared with just about Rs 5,597 crore or 41% of the target collected in May (15% April). The quarterly achievement of the state’s OTR were about 38% of the target in Q1 FY21.

Odisha, which garnered about 20% of monthly revenue targeted for April and 25% of the target in May, collected around 50% in June, the state’s finance secretary Ashok Meena said. However, the overall own revenue of the state was over 100% in June quarter of this fiscal compared with the year ago quarter thanks due to a one-time windfall from mining auctions, Meena said. The own revenues of the state in Q1FY21 were 74%of the receipts in the year-ago quarter. “Unless the economy returns to full normalcy, own tax revenue position will continue to be bad,” Meena said.

Himachal Pradesh, which reported 10% of targeted tax revenue collections in April, achieved over 50% in June, the state finance secretary Prabodh Saxena said, but he added VAT and excise revenues were still subdued. The Q1FY21 revenues of the state were around 50% of the collections achieved in the corresponding quarter last year.

“First seven days of July have been better, but it needs to be seen if this will be sustained or was a one-time pent up demand release,” Saxena said. Car and two-wheeler sales have increased as people are now not prepared to use public transport, he said. Himachal Pradesh, which has not tapped market for funds so far in this fiscal, plans to accelerate borrowings in the coming months if GST compensation arrears are not released.

Despite the recent release of Rs 36,500 crore by the Centre from the integrated GST pool, the state governments will require to be paid a whopping Rs 80,000 crore more as compensation for their state goods and service tax (S-GST) shortfall in the March-May period, going by the formula of 14% assured annual revenue growth.

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