Revenue Loss to States

• 14 May 2020

Why in News

According to estimates from the India Ratings and Research (a credit rating agency), the Covid-19 lockdown has caused 21 major States to suffer a collective revenue loss of about Rs. 97,100 crore for the month of April.

Key Points

• The lockdown caused disruptions to production, supply-chains, trade and the total washout of activities in aviation, tourism, hotels and hospitality.
  
  • The disruption caused has taken place with such a speed and scale that even if the lockdown is lifted, economic activity is unlikely to normalise in near future.
• Although, during the lockdown, nearly 40% of the economy was functional as economic activities defined as essentials were allowed to operate.
  
  • This means that despite the lockdown some amount of revenue did accrue to the states. But despite this, the states faced significant revenue loss in April.
• The lockdown has a more paralyzing impact on the states, which have a high share of own revenue in the total revenue mix.
  • For example, for Goa, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Tamil Nadu and Telangana 65%-76% of their revenue comes from their own sources.
• Both Union government and State governments are struggling due to the dried-up cash inflow.
  
  • But the problems of the States are more precarious because of the actual battle against the Covid-19 and the associated expenditure being incurred by them.
• Under the current circumstance, there is a fair amount of uncertainty regarding the quantum and timings of the states' receivables from the Centre. Their own sources of revenue have also fallen to abysmally low levels.
• This is pushing states to adopt austerity measures and combine it with exploring new/more ways of generating revenues.
  
  • Austerity measures include action by a government to reduce the amount of money it spends.
• Conclusion
  
  • The situation may improve somewhat in May 2020 due to the easing of some restrictions–
    
    • Allowing the liquor sale.
    • Raising the excise duty on liquor.
    • Some states have raised VAT on petrol and diesel.

Note

• Sources of State government revenue:
  
  • States’ Own Tax Revenue (SOTR),
  • Share in central taxes,
  • States’ Own Non-Tax Revenue (SONTR)
  • Grants from the Centre.
• States’ own revenue mainly comes from seven heads–
  
  • State Goods and Services Tax (SGST), State Value Added Tax (VAT)- mostly on petroleum products, State excise-mostly on liquor, stamps and registration fees, vehicle tax, tax and duty on electricity, and own non-tax revenue.

Source: TH