A burdensome time for states
There are growing concerns that the two major sources of tax revenues for state governments, the state goods and services tax (SGST) and central tax distribution, are likely to fall well short of their budget estimates for 2019-20. This may result in large fiscal slippages or cutbacks in expenditure at the state level towards the end of this financial year. The latter is a risk for the economic growth outlook of the country, and for the liquidity position of corporate that are engaged in projects at the state level.
Tax revenues earned by state governments are classified as own tax revenues and devolution of central taxes. Own tax revenues of the states are now denominated by SGST, which is budgeted to account for over 40% of the state's own tax revenues in FY20, while tax devolution to states is governed by the formulae prescribed by successive Finance Commissions, and takes its cue from the actual collections of the central government.
There are multiple concerns building up related to SGST collections. First, there are substantial discrepancies in the data available from the Rajya Sabha questions and the states’ own budget on revenues related to SGST and GST compensation received by them in FY19. Analysis suggests that several states had over-estimated such revenues in their revised estimates for FY19.
This optimistic forecasting of SGST collections seems to have persisted in the budget estimates for FY20. State governments, in aggregate, have estimated their SGST to expand by 11% in FY20 (budget estimates) relative to their FY19 revised estimates. However, the growth in headline GST collections was only 5% in the first half of the financial year. If the pace of growth of GST revenues doesn’t pickup in the second half, SGST collections may trail what states had forecast by around Rs 350-400 billion.