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COVID-19 impact | Tax devolution to states to be 30% lower than budgeted Rs 7.8 lakh crore

The provisional data released by the government shows that the centre's gross tax revenues contracted by 3.4 percent to Rs 20.1 lakh crore in FY 2020, from Rs 20.8 lakh crore in FY 2019

June 03, 2020 / 03:44 PM IST

The aggregate central tax devolution (CTD) to all states would be Rs 5.5 lakh crore for FY21, 30.5 percent lower than the CTD of Rs 7.8 lakh crore as estimated in the budget.

"Adjusting for the excess devolution of Rs. 0.5 lakh crore pertaining to FY2020 from the estimated CTD of Rs. 5.9 lakh crore, we estimate that the CTD of all states to be Rs 5.5 lakh crore in FY 2021... and a contraction of 16.2 percent relative to the amount transferred in FY 2020," a report published by credit rating agency ICRA said.

The provisional data released by the government shows that the centre's gross tax revenues contracted by 3.4 percent to Rs 20.1 lakh crore in FY20, from Rs 20.8 lakh crore in FY19.

Its gross tax revenues are Rs 1.5 lakh crore lower than the level

of Rs 21.6 lakh crore, as provided in the revised estimates (RE) for FY 2020. The agency believes that the extent of the shortfall is modestly higher than its estimate of Rs 1.2-1.3 lakh crore.

"... we estimate that the central tax devolution (CTD) included by the GoI in its RE for FY 2020 was around Rs 53,700 crore higher-than-warranted, in line with our earlier forecast of Rs 42,000 crore-Rs 55,000 crore. This amount would now be adjusted from the share in central taxes that would be devolved by the GoI to the state government in FY 2021," the report said.

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According to the provisional data for FY 2020 published by the government, the Centre transferred Rs. 6.5 lakh crore as CTD in FY 2020, 14.5percent lower than the Rs. 7.6 lakh crore devolved in FY19.

"In the ongoing fiscal, the tax collections of the GoI as well as of the state governments are expected to be considerably lower than the level forecast by them in their FY 2021 budgets," the report said.

This is indicative of the expected compression of consumption of several non-essential items during the period of the lockdown. Behavioural changes and economic uncertainty may delay the resumption of normal demand for discretionary goods and services even after the lockdown is lifted, which would continue to constrain tax collections, the report said.

In the FY21 Budget, the centre indicated a 12.0 percent year-on-year (YoY) growth in its gross tax revenues to Rs 24.2 lakh crore.

"This growth assumption appeared challenging even prior to the escalation of the Covid-19 crisis, and now seems exceedingly unlikely. Significantly lower-than budgeted gross tax revenues in FY 2021, would imply a sharp downward revision in the CTD for this year relative to the budgeted level of Rs. 7.8 lakh crore," the report said.

The report said that due to the expected curtailment in non-discretionary consumption and impact of the pandemic on corporate profitability, job losses and income levels, the centre's gross tax revenues will be limited to Rs 17 lakh crore, 30 percent lower than the FY21 BE of Rs 24.2 lakh crore.
Kamalika Ghosh
first published: Jun 3, 2020 03:44 pm

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