State finances to take bigger hit than Centre's due to coronavirus lockdown

Economists also expect states to take a haircut on revenues under the goods and services tax (GST) because of the lockdown’s impact on sale of non-essential goods & services.
The coronavirus disease (Covid-19)-induced lockdown is likely to hit state finances harder than the central government’s in financial year 2019-20 (FY20) and FY21.

This is because indirect taxes on transport fuel, vehicle sales, alcohol, real estate transactions, electricity, and films & entertainment account for a bulk of state governments’ tax revenues. And most of these economic activities have either come to a complete halt or have reduced drastically in past two weeks, resulting in a sharp dip in state revenues.

In comparison, the central government largely relies on taxes on income, both personal & corporate, manufacturing and imports, where the decline has not been as sharp and there is a strong possibility of a rebound once lockdown is lifted. (See the adjoining chart)

“States’ revenues largely come from taxes on various transactions that are down adversely, affecting their revenues during the lockdown. In contrast, taxes on income and manufacturing account for a large part of central government finances,” said G Chokkalingam, founder and managing director of Equinomics Research & Advisory Services.

Economists also expect states to take a haircut on revenues under the goods and services tax (GST) because of the lockdown’s impact on sale of non-essential goods & services.

“Nearly 80 per cent of GST revenues come from taxes on non-essential goods and services such consumer and electronic goods, fashion and entertainment, while most essential items such as food and personal care are either tax-free or under lowest tax slab,” said Madan Sabnavis, head economist CARE Ratings.

According to Reserve Bank of India’s data on state finances, GST was budgeted to account for 43 per cent of states’ own tax revenues, while the rest was expected to come from non-GST taxes such as sales tax and value-added tax (VAT), state excise, stamp duty and registration fee, taxes on vehicle and electricity charges, among others.

Given this, analyst expect a sharp dip in state governments’ GST and non-GST revenues in March and April.

In FY20, for example, all state governments put together had budgeted for Rs 3.26 trillion worth of revenues from sales tax and VAT, accounting for nearly a quarter of their own tax revenues, and around 10 per cent of their overall revenues, including share in central taxes. Taxes on fuel now accounted for bulk of the sales tax and VAT as most of other goods are under GST.

According to estimates by Indian Foundation for Transport Research & Training (IFTRT), only a third of trucks are on the road right now and there is a near total stoppage of bus and coach traffic. This has resulted in a sharp drop in the offtake of diesel fuel, the largest fuel source in the country.

According to data by Petroleum Planning & Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas, diesel accounted for 39 per cent of the entire consumption of petroleum products in India till February in FY20. It was followed by liquefied petroleum gas and motor spirit (petrol) in terms of tonnage.

State excise duty — mostly taxes on alcohol — was budgeted to net Rs 1.75 trillion, accounting for 13 per cent of their own tax revenues in FY20. Alcohol shops have been closed across the country, adversely affecting this revenue source as well.

It’s the same with real estate transactions as well, as they have come to a halt. Stamp duty and registration was expected to net around Rs 1.4 trillion worth of revenues to states in FY20, accounting for 10 per cent of their own-tax revenues. Taxes on vehicles and electricity were also a big source of revenues for states, expected to garner around Rs 1.22 trillion.

According to data from vehicle manufacturers, vehicle sales more than halved in March, while electricity consumption was down 40 per cent after the lockdown came into force.

CARE Ratings says there is some possibility of states recouping a part of revenues lost on stamp duty and registration once the lockdown ends, but it would be tough to recover nearly a month’s worth of revenue from fuel, electricity and alcohol and GST in the rest of the fiscal.

Not surprisingly, many states have announced plans to cut employees’ salaries, besides sending SOS’s to the central government to release more funds from the central pool.


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