Compensation for GST losses to impart certainty to state budgeting: ICRA

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New Delhi, March 7 (IANS) The compensation norms for revenue losses accruing from transition to the Goods and Services Tax (GST) system will bring certainty to state budgeting, rating agency ICRA said on Tuesday.

“The draft compensation norms for revenue losses related to the transition to the much-awaited GST will impart an element of certainty to budgeting at the state level, given that the transition may turn out to be temporarily disruptive, and that the pace of growth of central transfers to state governments is forecast to halve in the coming fiscal, ICRA said in a statement.

The states’ own revenues, subsumed into the GST, will grow by at least 14 per cent for the first five years after the transition to the GST, reducing the extent of uncertainty for state budget preparation, the statement said.

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The 2017-2018 Union Budget has forecast a reduction in the pace of growth of central transfers to state governments to 9.8 per cent in the Budget Estimates (BE) from 18.7 per cent in the revised estimates (RE) for 2016-2017, Jayanta Roy, Group Head – Corporate Sector Rating, ICRA, said.

“The pace of growth of central tax devolution is budgeted to decline to 10.9 per cent in FY2018 BE from 20.1 per cent in FY2017 RE, led by the slowdown in the year-on-year growth of the excise duty (to 5 per cent from 34.5 per cent) and service tax collections (to 11.1 per cent from 17.1 per cent),” Roy said.

“Any reduction in excise duty on fuels over the course of the year, intended to absorb a further rise in crude oil prices, will pose a downside risk to the state governments’ share in the central tax revenue,” Roy added.

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While some manufacturing-intensive states have expressed concerns regarding revenue losses on account of the shift from Central Sales Tax (CST) to the Integrated GST (IGST), ICRA expects this to be partly offset by higher revenues related to services accruing to nearly all the states, it said.

The GST on services accruing to the states on an aggregate basis will be twice as high as the share of service tax devolved to the state governments on every Rs 100 of taxable services in the current regime, as per ICRA estimates.

State governments’ revenue receipts comprise their own tax and non-tax revenue, as well as central tax devolution and grants from the Centre.

Central transfers, that is central tax devolution and grants from the Centre, account for around two fifth of the state governments’ revenue receipts in aggregate.

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