New Delhi [India], Mar 7 : Credit rating agency ICRA on Tuesday released its view on the draft compensation norms for revenue losses related to the transition to the much-awaited goods and services tax (GST) would impart an element of certainty for 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.

"The Union Budget for FY2018 has forecast a reduction in the pace of growth of central transfers to state governments to 9.8 percent in the budget estimates (BE) for FY2018 from 18.7 percent in the revised estimates (RE) for FY2017. However, states' own revenues, subsumed into the GST, would grow by at least 14 percent for the first five years after the transition to the GST, reducing the extent of uncertainty for budget preparation at the state level," said Group Head - Corporate Sector Rating ICRA, Jayanta Roy.

The pace of growth of central tax devolution is budgeted to decline to 10.9 percent in FY2018 BE from 20.1 percent in FY2017 RE, led by the slowdown in the year-on-year (YoY) growth of the Union excise duty (to 5.0 percent from 34.5 percent) and service tax collections (to 11.1 percent from 17.1 percent ). "Any reduction in excise duty on fuels over the course of the year, intended to absorb a further rise in crude oil prices, would pose a downside risk to the state governments' share of central tax revenue," added Roy.

The pace of expansion of grants from the Centre to the states is expected to moderate to 7.9 percent in the BE of FY2018 from 16.6 percent in the RE of FY2017, mainly led by the slowdown in growth of Finance Commission grants. This step down is in line with the recommendations of the Fourteenth Finance Commission (FFC), and, therefore, should not have come as a surprise to the states. On the other hand, the pace of growth of scheme-related transfers is set to rise modestly, to 5.5 percent in FY2018 BE from 3.2 percent in FY2017 RE.

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. The GST on services accruing to the states on an aggregate basis would 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.

Moreover, compensation of losses by the Government of India (GoI) would protect against any medium-term downside to the state governments' revenues. According to the draft Goods and Services Tax (Compensation to the States for Loss of Revenue) Bill, 2016, compensation for losses related to GST would be calculated using FY2016 revenues as the base year, with a projected nominal growth rate of 14 percent for the revenue streams subsumed into GST for each state, during the transition period of five years.

In the event of some states experiencing a revenue growth under GST of below 14 percent in the first five years, it would be neutralized, provided that the amount collected as GST Compensation Cess exceeds the total revenue losses of these states.

While the estimates made by the GoI regarding its tax growth introduce some uncertainty into state budgeting, optimistic estimates made by the states themselves, especially for grants, tend to introduce error into their revenue forecasts. For instance, between FY2012 and FY2016, the central taxes actually devolved to the states turned out to be two to 11 percent lower than the amount budgeted by the GoI. Encouragingly, the states' share in central taxes was revised upwards in FY2017 to Rs. 6.1 lakh crore from the BE of Rs. 5.7 lakh crore, primarily on account of higher excise duty garnered on fuels, which may not be the case in FY2018. Notably, the grants included by the state governments in aggregate in their BE or RE for FY2014 and FY2015, were a sharp 20 to 40 percent higher than the corresponding estimate included by the GoI for all states.

State governments' revenue receipts comprise their own tax and non-tax revenues, as well as central tax devolution and grants from the Centre. Central transfers, i.e. central tax devolution and grants from the Centre account for around two-fifths of the Indian state governments' revenue receipts in aggregate. (ANI)