Data shows manufacturing states’ edge under GST

Cogencis, Wednesday, Jan 29States have had a mixed experience under the goods and services tax regime so far. But contrary to expectations, it is the producer states that have fared well, while consumer states have been laggards in terms of GST collections. By Pratigya Vajpayee and Adrija ChatterjeeNEW DELHI — When the goods and services tax was being rolled out, manufacturing states had feared a loss of revenue under the new regime and not for entirely unfounded reasons.On The Losing Side Are Consumer States, Led By Kerala, Bihar, And Punjab, Whose GST Collections In Apr-Nov Fell Short Of Their Projected Levels By 80-104 Bln Rupees. Since GST is a destination-based tax, it was expected to be skewed in favour of consuming states. On the other hand, manufacturing states were seen at disadvantage compared with the earlier regime, under which value added tax was collected where the suppliers of goods and services were located.In fact, the government had originally proposed an additional 1% tax to compensate manufacturing states for their loss in the initial years.Two-and-a-half years on, the GST collection figures for states tell an entirely different story.GST data for Apr-Nov show that revenues of most manufacturing states are growing at over 14%, the buoyancy guaranteed under the Constitution amendment for the first five years. On the other hand, GST revenues of many consuming states are growing at rates lower than 14%.The Constitution amendment Bill guaranteed compensation to states to ensure revenue buoyancy of 14% in the first five years of the new tax regime, which was rolled out on Jul 1, 2017.Out of 30 states and union territories for which data has been released, GST revenues of 14 were in surplus of the projected level for Apr-Nov, while the rest witnessed a shortfall.The biggest beneficiary under the GST regime seems to be Maharashtra, a major producer state. The state’s GST collections in Apr-Nov were 881.2 bln rupees, nearly 200 bln rupees more than what was required to achieve a compounded annual growth rate of 14%. The other top performers include Haryana, Jharkhand, and Gujarat — all of which have large manufacturing industries.Tamil Nadu, a state that had vociferously opposed the implementation of GST citing potential loss of revenue, had surplus revenue of 25.9 bln rupees in the first eight months of the current financial year.Before the GST was rolled out, the then chief minister of Tamil Nadu late J. Jayalalithaa had opposed the move citing revenue loss for the manufacturing state as the new indirect tax regime would permanently shift levy from the point of origin to the point of destination.On the losing side are consumer states, led by Kerala, Bihar, and Punjab, whose GST collections in Apr-Nov fell short of their projected levels by 80-104 bln rupees.   THE GREAT DIVIDENot only did producer and consumer states show divergent trends in GST collections, but also the disparity in their revenues is particularly wide.While states that are major producers of goods and services have clocked a compounded average growth rate of around 15-30% in their GST revenues, indirect tax collections for some consumer states witnessed negative growth of 5-7%, data for Apr-Nov showed.The wide difference in the fortunes of producer and consumer states could be explained by the ongoing consumption slump in the economy. The Latest available data showed private consumption grew at 4.1% during Apr-Sep as against 8.5% in the corresponding period a year ago.States that are solely dependent on end consumption are particularly at a disadvantage, whereas producer states could be better off because their manufacturing supply chains also generate destination-based tax.”It is incorrect to predict that the consuming states will gain revenue due to destination based nature of GST,” M. Govinda Rao, former director of National Institute of Public Finance and Policy, said.”In fact, the states got the powers to levy tax on services when the GST was imposed and it is the more advanced states that are likely to gain from that,” he said.When producer states feared that they would lose out under GST, perhaps they did not take into account the fact that manufacturing industries are also huge consumers of raw materials and services.States, including Punjab and Kerala have also been seeking an extension of the guaranteed compensation under GST by another two years to 2023-2024 due to fall in revenue collections.The fear that several states will find themselves in dire straits in terms of revenue collections under the GST was further cemented due to recent delays by the Centre in paying compensation amount.What is even more worrisome is that states will receive guaranteed compensation under GST for only two more years. This means that the GST council has to move swiftly in fixing the discrepancies in the system. (This story is part of a series of Cogencis special stories in the run-up to the Union Budget 2020-21, to be presented by Finance Minister Nirmala Sitharaman on Feb 1)EndEdited by Arshad Hussain

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