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Tax cuts to impact revenue collection of States, says RBI report
October, 04th 2019

RBI’s annual report gives comprehensive data on on the fiscal health of states
Revenue trends for States seems to be stabilising after initial volatility in the goods and services tax (GST) and now seems to be on the rise but a recent report by the Reserve Bank of India (RBI) has said that except for a few states, desired results from the new indirect tax levy is still elusive.

Increasing collections from the levy is also essential as the recent cuts in corporate tax and GST will boost investment but could also lead to revenue loss for States this fiscal, noted the RBI report on State Finances: A Study of Budgets of 2019-20.

Read more: Finance Minister unleashes corporate ‘animal spirits’

Also read: Hotel tariffs, outdoor catering get GST rate cuts

GST collections have already dipped to a 19-month low of Rs 91,916 crore in September due to the current economic slowdown.

Related news: At ?92,000 crore, GST mop-up in September dives to a 19-month low

The effective weighted GST rate is now at 11.6 per cent from 14.4 per cent when the tax system was launched, it noted. The indirect tax levy accounts for nearly 50 per cent of the revenue for States and about 37 per cent for the Centre.

“Barring a few states, however, the desired GST targets have proved elusive so far warranting compensation cess in the first two years of implementation,” the report said, adding that “concerted efforts must be taken to improve revenue by plugging loopholes and mitigating IT glitches.

The report also highlighted the need to subsume alcohol and petroleum related levies within GST and called for a restructuring of the old set up under value added tax and improving data analytics by using GST Network.

The annual study is considered to be one of the most comprehensive reports on the fiscal health of states.

In 2017-18, when GST was introduced from July 1, collections from the tax amounted to 26.3 per cent of the States’ own revenue receipts, which rose to 35.3 per cent in the Revised Estimates for 2018-19 and is a just a notch lower at 35.4 per cent in the Budget estimates for the current fiscal.

However, according to the report, GST compensation cess has risen from 2.6 per cent in 2017-18 to 4.1 per cent in 2018-19 (RE) and is estimated at 4.5 per cent this fiscal.

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