Indian States’ fiscal outlook remains favourable in the current fiscal year on account of resilient domestic economic activity, which is expected to support revenue buoyancy, according to an Reserve Bank of India (RBI) report. The report pointed out that States have contained the growth in revenue expenditures to 15 per cent during April-October, below the full-year budget estimate of 19.2 per cent.
In FY24, provisional accounts (PA) indicated that States’ revenue receipts moderated by 0.30 percentage points to 13.3 per cent of GDP, primarily due to a sharp dip in grants-in-aid from the Centre. Tax collections improved due to an increase in both own tax revenue and tax transfers from the Centre. Within States’ own tax revenues, SGST registered robust growth, supported by higher economic activity and improved compliance.
States with a history of a low tax-GSDP ratios have witnessed considerable improvement in revenue mobilisation since the implementation of GST, leading to a reduction in inter-State disparities in tax collection. Sales tax collections, meanwhile, remained muted.
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“In 2024-25, the States have budgeted an increase in revenue receipts by 1 percentage point to 14.3 per cent of GDP, driven by both tax and non-tax sources. In the Union Budget, the devolution of States’ share in taxes is projected to grow by 10.4 per cent in 2024-25 (BE) over 2023-24 (PA),” the report said.
“Within States’ own tax revenue, all major taxes – SGST, excise duties, and sales tax – are expected to increase. These key taxes account for over 75 per cent of total own tax revenue,” it added.
Revenue boosting measures
States are undertaking various initiatives to boost revenue collection, streamline compliance, and enhance transparency. Gujarat has established GST Seva Kendras to simplify registration and prevent documentation misuse, while Haryana plans to create facilitation cells to assist startups and MSMEs with GST compliance.
Data analytics is being increasingly harnessed to track, monitor, and simplify the refund process. Delhi aims to develop a faceless GST tax administration, and Tamil Nadu and Karnataka use AI for real-time monitoring. Amnesty schemes have been introduced in States like Kerala and Rajasthan to waive penalties on tax arrears.
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Further, the July 25, 2024 verdict given by the Supreme Court which granted States the authority to impose taxes on minerals and land containing minerals as well as to claim royalty payments retrospectively from April 1, 2005, will significantly benefit mineral-rich States such as Andhra Pradesh, Chhattisgarh, Jharkhand, Karnataka, Odisha, Madhya Pradesh, Maharashtra, Tamil Nadu, and Telangana.
Revenue expenditure
On the expenditure side, States have contained the growth in revenue expenditures to 15 per cent during H1FY25, below the full-year budget estimate of 19.2 per cent.
However, the capital outlay of the States is expected to gain pace in the second half of the year, aided by the Centre’s 50-year interest-free loans.