States' GST revenue takes bigger hit than Centre's in April-June

July 1 was as much a cause for concern, as it was a reason to celebrate for the government. While celebrating the second anniversary of goods and services tax (GST), the government confronted the fact that growth in monthly revenue in June was the lowest achieved in the last nine months, at 4.5 per cent year on year. 

But a deeper look into the available data reveals that the Centre’s and states’ GST revenues are slowly converging, courtesy a faster growth in the Centre’s GST revenue in comparison to states’ GST revenue. 

States have suffered a slower growth than the Centre when it comes to growth in revenue in the first three months of FY20, the charts show. While the Centre’s revenue after settlement of Integrated GST (IGST) grew by 46 per cent, 25 per cent and 16 per cent respectively, in April, May and June, the growth in states’ GST revenue was 26 per cent, 14 per cent, and 6 per cent. 

This happened largely because of slowing growth in the economy and the settlement of a higher proportion of IGST towards the Centre than the states in particular. 

Government officials think that the GST cannot grow too fast than the growth rate of the economy. 

“If the economy itself is growing below 6 per cent, it would be a miracle if revenues grow at the required 15-16 per cent,” a senior finance ministry official said. India’s gross domestic product grew at a dismal 5.8 per cent in January-March 2019, lowest in five years. 

Now, IGST is levied on imports and inter-state supply of goods and services, and is then distributed among the Centre and the states involved in the supply. In the first quarter of FY20, IGST growth gradually deteriorated due to the economic slowdown, culminating into a situation where the IGST actually contracted 4 per cent year-on-year in June. This reduced the very amount in the first place that gets distributed between the Centre and the states. 

Further, while revenues collected purely as CGST and SGST prior to IGST settlement grew with a similar vigour in April-June 2019, regular settlement of IGST happened more towards CGST than SGST. This ensured that while CGST growth remained robust (see chart), SGST growth plummeted from 11 per cent in April 2019 to merely 6 per cent in June 2019. 

This phenomenon, namely the Centre’s kitty getting more than states’ kitty from IGST account, is explained by two factors. One, the transitional credit that most businesses used to pay CGST (set off CGST liabilities) in the initial months of GST has gradually reduced over time. Two, when businesses started using IGST credits to pay off CGST or SGST, they used it more to pay off CGST as rules mandated that preference. 

Rules have been made more flexible now, by allowing companies to set off either of the two: CGST or SGST, using IGST credits in any order and proportion. But the data in question reflects the older rules where more IGST credit was used to set off CGST, than SGST. 
 

If we add the ad hoc (or provisional) settlement of IGST, the growth in the Centre’s revenue still remains considerably better than that in states’ revenue. 

But this in no way has been unjust to states. Rather, as a result of this, CGST and SGST are slowly converging: meaning, the proportion of the Centre’s revenue and states’ revenue in the overall GST collection is nearing 50:50. 

As share of IGST going to the Centre rose from 49 per cent in April 2018 to 57 per cent in June 2019, (the share of states reducing from 51 per cent to 43 per cent), the Centre improved its share in overall GST revenue from 45 per cent to 48.4 per cent over the same period. 

Experts think that states will face a slower growth in GST revenue for some months. “With IGST being used more to set off CGST liabilities due to inherent rules of the system, a situation where growth in Centre’s GST revenue is higher than that of states was bound to happen,” said Kavita Rao, professor of economics at the National Institute of Public Finance and Policy.