States To Face Revenue Loss Of Rs 44,000 Crore After Fuel Tax Cuts: ICRA
The reduction in excise duty and value-added taxes on petrol and diesel is expected to cause a Rs 44,000 crore revenue loss to states in fiscal year 2021-22, according to ICRA Ltd.
However, the loss in the ongoing financial year will be less than the gains from higher-than-budgeted tax devolution by the federal government to states, the rating agency said. The tax devolution will exceed the central government’s FY22 budget estimates by Rs 60,000 crore.
The central government last week reduced the excise duty on petrol and diesel by Rs 5 and Rs 10 a litre, respectively. Since most states levy VAT on an ad valorem basis, this will lower their inflows by around Rs 9,000 crore, Aditi Nayar, chief economist at ICRA Ltd., said.
“Subsequently, varying VAT cuts on fuels have been announced so far by 25 states and union territories, and others may well follow,” she said. “We tentatively estimate the revenue loss to all states and union territories from the VAT cuts on these fuels at Rs 35,000 crore. Accordingly, their total revenue foregone is assessed at Rs 44,000 crore for FY22, in line with the expected revenue loss of the government of India.”
But, states' financials will benefit from higher devolution. ICRA estimates tax devolution to states to exceed the central government’s provisional actuals for FY21 by Rs 1.3 lakh crore and budget estimates of FY22 by Rs 60,000 crore. Yet, tax devolution to states was nearly unchanged at Rs 2.6 lakh crore in the first half of each fiscal, raising concerns about back-ended payouts, ICRA noted.
“Based on the expected upward revision in tax devolution to Rs 7.3 lakh crore in FY22 from the budgeted Rs 6.7 lakh crore, the retention of the monthly amount of tax devolution at Rs 47,500 crore in October-February FY22, will back-end the release of Rs 2.3 lakh crore to March 2022,” she said. This will be inefficient from the cash-flow perspective for the states, Nayar said.
There is a renewed case for the government of India to increase the monthly devolution to the states to avoid back-ended transfers, she said. “The revenue visibility will enhance confidence and allow them (states) to expedite expenditure, especially growth supportive capital spending.”
Especially given the increase in guarantees extended by some state governments in the recent years. The lack of data makes the precise increase difficult to gauge and it's also unclear what portion of these guarantees have been extended to non-revenue generating projects, ICRA noted. "This poses a fiscal risk, particularly given the modest contributions made by several states to their guarantee redemption funds," Nayar said.