Subdued GST collections, lower tax devolution will impact state finances, pose macro risks -Jayanta Roy and Aditi Nayar

-The Indian Express

To avoid a substantial fiscal slippage at the state government level, a sizeable expenditure reduction or deferral is likely to be required, given that the borrowing limit set by the central government acts as a soft constraint to the size of the states’ fiscal deficits.

There are growing concerns that the two major sources of tax revenues for state governments, the state goods and services tax (SGST) and central tax devolution, are likely to fall well short of their budget estimates for 2019-20. This may result in large fiscal slippages or cutbacks in expenditure at the state level towards the end of this financial year. The latter is a risk for the economic growth outlook of the country, and for the liquidity position of corporates that are engaged in projects at the state level.

Tax revenues earned by state governments are classified as own tax revenues and devolution of central taxes. Own tax revenues of the states are now dominated by SGST, which is budgeted to account for over 40 per cent of the states’ own tax revenues in FY20, while tax devolution to states is governed by the formulae prescribed by successive Finance Commissions, and takes its cue from the actual collections of the central government.

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The Indian Express, 4 October, 2019,

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