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States record jump in VAT collections after note ban
January, 09th 2017

Demonetisation seems to have led to a windfall for states thanks to a spurt in value added tax (VAT) collections since Prime Minister Narendra Modi’s November 8 announcement, according to the latest data.

This appears to undermine the contention that the cash crunch punctured demand after the government invalidated Rs 500 and Rs 1,000 currency notes.

Most states witnessed a sharp increase in sales tax collections, with those of Nagaland, Meghalaya and Jammu & Kashmir surging by 133%, 84% and 82%, respectively.

States record jump in VAT collections after note ban

The combined VAT collections of 23 states, which have provided data to the Centre, was up 18.1% in November, suggesting strong sales. For December, data is available for 17 states and that shows a rise in tax on the sale of goods at 8.9%.

The data substantiates the central government’s claims that demonetisation has had a positive impact on revenue collection.

The Centre’s own revenues were up sharply in November. Among the big states, only West Bengal reported a VAT contraction of 7.84% in December.

Economists however were cautious about making definitive judgements based on the data. “This seems to be largely because traders rushed to get rid of old notes... booked higher sales,” said Abheek Barua, chief economist, HDFC Bank. “It could also be due to the increase in petrol and diesel prices.”

DK Joshi of Crisil described the revenue increase as a blip.

“This jump is due to demonetisation. Traders would have deposited higher taxes to get rid of old currency. They would have collected dues against sales and paid taxes on them,” he said.

Tax collections for a number of states in December continued to show higher growth than October though lower than November. Barua said the move toward cashless payments will have a positive impact on tax collections in long run.

According to VAT collection data for November and December 2016, the manufacturing states of Maharashtra and Tamil Nadu showed growth in both the months over the same period a year earlier. For Gujarat, the other big manufacturing state, data is not available.

Maharashtra’s VAT collections grew 25.99 % in November and 16.73 % in December against 4.74% in October. Tamil Nadu’s VAT collections grew 5.96%, 9.72% and 11% in October, November and December, respectively.

Arunachal Pradesh and Tripura saw a decline in November VAT collections though they had seen a rise in October. West Bengal and Kerala showed lower growth over October. West Bengal's collections fell by about 8% in December. Meghalaya witnessed a decline of 66.41% in December 2016. Uttar Pradesh reported a 16% surge in VAT collections in November and followed that with a 6.9% rise in December.

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