ICRA expects the Government of India's (GoI's) indirect tax revenues to fall short of its Budget Estimates (BE) for FY2019, driven by lower-than-budgeted collections of the Central GST (CGST) and the excise duty on fuels. The anticipated shortfall in these two indirect taxes, is likely to lead to a downward adjustment in the Central tax devolution (CTD) to the states[1] in FY2019, relative to the level budgeted by the GoI, which has emerged as a risk to the achievement of the FY2019 BE for the revenue receipts of the state governments. However, the state GST (SGST) collection trend in April-November 2018, suggests that the aggregate SGST collections of all states may modestly exceed their combined FY2019 BE, providing a buffer to the lower CTD.
Jayanta Roy, Group Head - Corporate Sector Rating, ICRA, said, ''ICRA estimates that the CGST collections during April-November FY2019, were equivalent to around half of the Rs. 6.0 trillion included by the GoI in its FY2019 budget, which suggests an impending shortfall relative to the level budgeted for this fiscal. As of now, it appears that there would be a shortfall in the overall tax revenues of the GoI, relative to the budgeted target for FY2019, which is likely to lead to a downward adjustment in the CTD to the states in the ongoing fiscal. This has emerged as one of the key risks to the achievement of the budgeted level of revenue receipts of the state governments.''
In October 2018, the GoI had cut the excise duty on petrol and diesel by Rs. 1.5/litre each, which is expected to have a revenue implication of Rs. 105.0 billion. This would impact the GoI's excise collections in H2 FY2019.
The GoI's direct taxes rose by 16.4% in April-October FY2019, nearly in line with the growth of 17.4% included in FY2019 BE. Notwithstanding concerns related to the inflows from the long-term capital gains tax, ICRA does not expect a meaningful shortfall in the GoI’s direct tax collections, relative to the BE for FY2019.
The SGST and sales tax/VAT on petroleum and petroleum products form a large portion of the states' own tax revenues, which are in turn budgeted to account for ~43% of the aggregate revenue receipts of all 29 states in FY2019. ICRA expects the state governments' tax revenues from petrol and diesel to be dampened in H2 FY2019, reflecting the cut in the rate of VAT/sales tax levied on such fuels by several states in the recent months, which was followed by a fall in the retail selling prices of such fuels.
ICRA also estimates the aggregate SGST collections of all 29 states at Rs. 3.4 trillion for the first eight months of the ongoing fiscal. This is equivalent to a healthy ~70% of the Rs. 4.9 trillion budgeted by all the states for FY2019, considerably higher than the level of CGST collections relative to the FY2019 BE of Rs. 6.0 trillion. ''The trend so far, suggests that the aggregate SGST collections of all states may modestly exceed the combined FY2019 BE, acting as a buffer to the lower CTD,'' Roy added.
An analysis of the monthly provisional data available from the Comptroller and Auditor General of India (CAG) for 20 state governments reveals that the pace of growth of their aggregate revenue receipts stood at 13.7% in H1 FY2019, slightly higher than the 13.3% rise indicated in the BE for FY2019. Moreover, the combined revenue expenditure and capital outlay of these states increased by 12.5% and 16.8%, respectively, in H1 FY2019, higher than the growth of 10.8% and 9.9%, respectively, included in FY2019 BE. The higher-than-budgeted pace of growth of revenue expenditure in H1 FY2019 could partly be because of the pre-election spending by Chhattisgarh, Rajasthan and Madhya Pradesh. Additionally, the massive flooding in Kerala and in parts of Karnataka in August 2018 and the cyclonic storm that hit TN in November 2018, may lead to these states incurring additional spending on rehabilitation work, which may in turn lead to the aggregate revenue expenditure of the 20 states exceeding the budgeted level in FY2019.
Following the sharp 16.8% increase in capital outlay, the fiscal deficit of the 20 state governments stood at Rs. 1.6 trillion during H1 FY2019 or 36.5% of the FY2019 BE, higher than the trend in H1 FY2018 (33.9% of the FY2018 revised estimates). In ICRA’s view, given the concerns related to the level of CTD and VAT/sales tax revenues from fuels, some states may have to curtail the pace of growth of their capital spending in H2 FY2019, to avoid a slippage relative to the budgeted level of the fiscal deficit for FY2019.
