Due to prevailing uncertainty about the revenue outcome from the GST implementation, the outlook for revenue receipts of states could turn uncertain.
The Goods and Services Tax (GST) is likely to impact inflation over one and half years but may have a positive impact on state finances and ensure higher tax buoyancy over the medium term, according to the Reserve Bank of India.
“The impact of GST on CPI (consumer price index) inflation would largely depend on the four-tier standard rate (5, 12, 18 and 28 per cent) that has been decided by the GST Council although almost 50 percent of the CPI basket is expected to be exempted,” RBI said in a study on state finances report released on Friday.
“In the Indian context, the implementation of GST is likely to have a pass-through impact lasting 12-18 months on the inflation trajectory,” it added.
Further, due to prevailing uncertainty about the revenue outcome from the GST implementation, the outlook for revenue receipts of states could turn uncertain.
However, RBI said, there is the cushion of compensation by the Centre for any loss of revenue for the initial five years. In this context, GST remains the best bet for states in clawing back to the path of fiscal consolidation over the medium term.
The GST is likely to roll out on July 1, 2017. The GST is a destination-based single tax on the supply of goods and services from the manufacturer to the consumer and is one indirect tax for the entire country. It will replace multiple taxes such as central value added tax, central sales tax, state sales tax and octroi.
RBI said that the GST implementation will help meet the fiscal consolidation path with the states being unable to rationalise their committed expenditure burden (viz., pension liabilities, interest obligations and administrative expenses) in the near term helping revenue expansion.
"The GST is likely to chart out a new course for cooperative federalism in India focusing on cooperation between the Centre and states in deciding on (i) tax rates, (ii) exemptions and (iii) commodities featuring in each category of tax rate/slab," the central bank said.
Apart from that, GST implementation may increase the shareable pool of resources which would result in greater transfer of resources from the Centre to the states.
State finances worsen
Putting out a budgeted state finance report, RBI said that the consolidated state finances of 25 states has deteriorated in the last five years to a decade low with its GFP to GDP (gross fiscal deficit to gross (state) domestic product) ratio of states at 2.5 percent.
Averaging around 2.5 percent in the last five years (2011-12 to 2015- 16) as compared with 2.1 per cent during the previous quinquennium (a five-year period), the GFD-GDP ratio in 2015-16 breached the 3 percent ceiling of fiscal prudence for the first time since 2004-05, the central bank said in the report.
RBI further said that despite the increase in the debt burden of the states in recent years, the overall fiscal position is found to be sustainable in the long run.
Based on information pertaining to 25 states, the consolidated gross fiscal deficit to gross state domestic product (GFD-GSDP) ratio is budgeted to moderate to 2.6 percent in 2017-18 as compared with 3.4 percent during 2016-17.
There are, however, several downside risks like implementation of recommendations of states’ own pay commissions, farm loan waiver in some states, and revenue uncertainty on account of the implementation of GST.