In addition to devolution of central tax revenue and grants-in-aid, states generate a major share of their income from state level taxes which constitute the State’s own Tax Revenue (SOTR). In 2018-19, the shortfall in SOTR was 7.5% compared to budget estimates. This shortfall in the case of central taxes is around 9%.
Similar to the Union Budget, the states also estimate revenues that could be earned in a particular financial year and plan their expenditure accordingly. The sources of State revenues include the taxes levied by the states, non-tax revenue, share in the central tax revenue as well grants-in-aid by the central government. All these estimates are made in the state budget document. The various types of taxes levied by the state are collectively known as ‘State’s Own Tax Revenue’ or SOTR.
The actual revenue earned by state own’s taxes varies from the estimated revenue, which could have an impact on fiscal deficit and other plans. At the same time, share in central tax revenue depends on the central tax collections. The state government does not have much influence as far as share in central taxes is concerned. While there is a dependency on the Centre for any grants, a major portion i.e. nearly half of the revenue earned by the states is through their own state-level taxes & other forms of revenue. As per RBI’s State Finances – A Study of Budgets of 2019-20, out of the total revenue of the States’ nearly 45% is from their own taxes.
Actual Central tax collections in 2018-19 are 9% less than the budget estimates
The Centre has provided the actual figures of the revenues & expenditure for 2018-19, while presenting the Union Budget for 2020-21. It has reported actual Gross Tax Revenue for 2018-19 as ₹ 20.8 lakh crores as against the revised estimate of ₹ 22.48 lakhs i.e. 92% of the revised estimate. The original budget estimate of revenue to be collected in 2018-19 was ₹ 22.71 lakh crores i.e. the actual tax revenue is around 91% of budget estimate.
Hence, even the amount devolved to the states also has a shortfall compared to the original estimates. ₹ 6.78 lakh crores were devolved to states in 2018-19 from the divisible pool while the revised estimate for 2018-19 was ₹7.36 lakhs. In other words, the shortfall in devolution is more than 9% compared to the revised estimate. Since there is a shortfall in central devolution, the states have to increase their own tax revenues (State’s own Tax Revenue – SOTR) if they are to implement all budget plans without any deviation. However, this does not happen, and even states do not achieve their estimated tax revenue targets. Here is a look at the data for the states and the corresponding shortfall in their own tax revenue compared to the budget estimates.
The data for this analysis is taken from the ‘Account Statements’ submitted by each of the states to the Comptroller and Auditor General of India (CAG). Data is not available for Delhi, Goa and Puducherry and hence they are excluded from the analysis.
Maharashtra followed by U.P & Karnataka have the highest SOTR for 2018-19
In terms of the actual collection, Maharashtra has the highest SOTR for 2018-19 with ₹ 1.87 lakh crores. The Budget estimate of SOTR for Maharashtra was ₹ 2.03 lakh crores.
Uttar Pradesh, the most populous state in India has the second-highest SOTR with ₹ 1.56 lakh crores. Tamil Nadu, which stands third in terms of the estimated SOTR of ₹ 1.12 lakh crores has reported the actual SOTR to be ₹ 1.05 lakh crores and stands at the 4th position. Tamil Nadu’s position is exchanged with Karnataka, which has the 4th highest estimates but 3rd highest actual SOTR for 2018-19.
Actual SOTR of 6 States more than the budget estimates for 2018-19
Of the 28 states for whom the data is available with CAG, only 6 states have reported actual SOTR which is more than the budget estimates for 2018-19. The states are – Manipur, West Bengal, Odisha, Meghalaya, Tripura and Sikkim.
Manipur’s actual SOTR for 2018-19 is 148% of the estimated tax revenue. The estimate was ₹706 crores, while actual SOTR was ₹ 1046 crores. However, tax earned as a share from central taxes is lower i.e. ₹4689.59 crores (estimate was ₹ 5249 crores). The same is the case for other 3 smaller states of Meghalaya, Tripura and Sikkim where the actual SOTR is higher than the estimate, but the share of central taxes is lower than the estimates.
Among the bigger states, West Bengal and Odisha have reported actual SOTR which is higher than the budget estimate for 2018-19.
The SOTR for West Bengal and Odisha are 134% and 106% of the budget estimates. West Bengal estimated ₹ 45 thousand crores as SOTR for 2018-19, while the actual earnings were ₹ 60.7 thousand crores. Meanwhile, Odisha’s actual SOTR was ₹30 thousand crores compared to the estimate of ₹ 28.5 thousand crores.
Among the other bigger states – Gujarat, Rajasthan, Jammu & Kashmir (which is now a UT), Karnataka and Kerala have reported the actual SOTR which is more than 95% of the budget estimates. The actual SOTR of these states is 99.8%, 98.8%, 98%, 97.9% and 95% of the budget estimates respectively.
The actual SOTR of Madhya Pradesh, Punjab and Jharkhand was 80% of the budget estimates for 2018-19. The actual SOTR as reported by Arunachal Pradesh was only 20.9% of the estimated ₹ 5 thousand crores in 2018-19.
Collections of State GST & Sales Tax have a major bearing on actual SOTR
State GST and Sales Tax form the major components of SOTR. Out of the total actual SOTR, SGST forms approximately 44% and Sales tax forms nearly 22%. Hence the collection of these two has a major bearing on SOTR.
West Bengal whose actual SOTR was 34% more than the estimates reported more than double the SGST collections compared to the estimates in 2018-19. Its SGST earnings were 206% of the estimates. Even the sales tax collections in West Bengal were 111% of the estimates. Odisha, the second-best performing states in terms of actual vs estimated SOTR has collected 99.8% of estimated SGST and 106.3% of the estimated sales tax in 2018-19.
Gujarat which reported an actual SOTR of 99.8% compared to estimates has performed poorly in terms of SGST collections. It’s actual SGST collections were only 81.6% of the estimates. Such poor collections were compensated by around 107% of sales tax collections compared to the estimates.
Chhattisgarh’s actual SOTR was only 82.3% of the estimates. However, the actual collections of SGST & sales tax were 164% and 110% of the estimates respectively. The shortfall in SOTR is primarily due to the lower than expected collections under the head ‘Other Taxes and duties’, where only ₹ 3 thousand crores were collected as against the estimated ₹ 10.5 thousand crores.
AP & Telangana have received the least % of the estimated Grants in Aid for 2018-19
Apart from the share in central taxes and SOTR, various grants received from the Centre also form a major portion of the state budget. For the year 2018-19, Telangana has estimated a receipt of ₹ 29 thousand crores worth of grants-in-aid from the centre. However, the actual grants received was only ₹ 8 thousand crores i.e. only 28.16% of the estimates.
Similarly, Andhra Pradesh was estimated to receive around ₹ 51 thousand crores, but actually received only 38% of the estimate i.e. around ₹ 19 thousand crores. The previous year, i.e. in 2017-18, Andhra Pradesh received 60% of the estimated grants-in- aid.
Meanwhile, Bihar, which estimated the receipt of ₹ 46 thousand crores received around ₹ 25 thousand crores i.e. 53% of the estimate. U.P, Rajasthan, J&K and Jharkhand have received less than 70% of the estimated grants for the year 2018-19.
Meanwhile, 6 states have received more grants-in-aid than the estimated amount for 2018-19. Punjab, which estimated ₹ 8.5 thousand crores received ₹ 11 thousand crores as grants i.e. around 130% of the estimate. Punjab also received higher than the estimated amount of grants (114%) even in 2017-18.
Gujarat received nearly ₹ 19 thousand crores in grants compared to the estimated amount of nearly ₹ 16 thousand crores in 2017-18.
Tamil Nadu, Kerala, Himachal Pradesh and Maharashtra are the other states who have received more in grants-in-aid compared to the estimates in 2018-19.
More realistic estimates help in better planning
Over the past couple of years, the growth in actual tax collections has reduced owing to multiple factors. Any decrease in central tax collection has a ripple effect on states since devolution & grants-in-aid from the centre together form an important part of the state’s revenues.
Various welfare schemes, plans & state development expenditure are planned taking into consideration the estimated revenues. Any major shortfall in the estimated revenues will have a debilitating impact on these plans.
It is imperative that the states work on increasing SOTR like SGST, sales tax, Land Revenue, Stamps & Registration fees etc. More prudent & realistic estimation of tax revenues would help to plan out the expenditure better.
17 out of the 28 states, of which 14 are larger states have generated less than 95% of the estimated SOTR. This difference would put a strain on the resources and can increase the fiscal deficit or delay major plans.
Featured Image: Shortfall in State’s own Tax Revenue