Even as state revenue receipts have returned to the pre-pandemic level, Goods and Services Tax (GST) collections of states as a percentage of Gross State Domestic Product (GSDP) remain below pre-GST levels, as per a recent report ‘State of State Finances’ by PRS Legislative Research. With the GST compensation grants having ended in June 2022, there has been an adverse impact on some states, it said, adding that increasing the level of GST revenue may require rationalization in tax slabs.
States continue to have a high level of committed expenditure, and persistent revenue deficit. Increase in non-merit subsidies, reversal of pension reforms, and poor financial conditions of state-owned discoms are some of the key challenges for state finances, the report said.
1. State GST (SGST) accounts for over 40% of states’ own tax revenue but SGST to GSDP ratio continues to be lower than the pre-pandemic level. SGST revenue is also lower than the level of guaranteed revenue for five years.
* In the pre-GST period, revenues from taxes subsumed under GST were around 3% of GSDP for 27 states/UTs. In 2018-19, the first full year of GST, this ratio was 2.7%, and it has stayed below 3% in subsequent years.
2. Post-June 2022, states more reliant on GST compensation, such as Puducherry, Punjab, Delhi, Himachal Pradesh, Goa, and Uttarakhand, are likely to be the most affected. Puducherry, Punjab, and Himachal Pradesh have budgeted a revenue deficit in 2023-24 (FY24).
3. In FY24, 11 states have budgeted a revenue deficit–a gap between revenue expenditure and receipts. Of these, Andhra Pradesh, Himachal Pradesh, Kerala, Punjab, and West Bengal did so after accounting for revenue deficit grants.
* If revenue grants, as recommended by the 15th Finance Commission, were not provided, six more states, including Assam, Nagaland, and Uttarakhand, would have been in revenue deficit in FY24.
4. Over the past several years, states have spent around 8-9% of their revenue receipts on subsidies, with a significant portion on power subsidies. Concerns have been raised over rising subsidies for non-merit goods in several states over potential constraints in the availability of fiscal space for capital expenditure.