Coronavirus impact: States stare at tax revenue loss of Rs 3 lakh crore in FY21

States are likely to witness tax revenue loss of over Rs 3 lakh crore during the current fiscal due to coronavirus lockdown, which has created a massive disruption in state finances, according to SBI Ecowrap report. According to an estimate by State Bank of India, revenue loss of an entire month in components like State VAT, excise, stamps and registration is expected to be around Rs 53,000 crore. Combining this figure with estimated loss in SGST, major states are likely to see a decline of Rs 1.2 lakh crore in revenue during the first quarter itself, translating into an annual loss of Rs 3.1 lakh crore, it said.

Tax revenue situation of states remained extremely grim during the current fiscal as overall GST collection for the month of April was Rs 32,294 crore, which was 28% of the revenue collected during the same month last year. For May, the GST collection was down 62% YoY at Rs 62,009 crore, while it was down 91% YoY at Rs 90,917 crore for June. GST collection for the April-June quarter of the year was 59 per cent of the revenue collected during the same quarter last year.

How this revenue shortfall of states can be bridged

In a bid to bridge state government's revenue gap, the Centre has increased borrowing limits of states in view of the unprecedented situation due to COVID-19.  Centre has decided to increase borrowing limits of states from 3% to 5%, for 2020-21 only. This will give states extra resources of Rs 4.28 lakh crore.

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As per SBI report, out of 20 states only 8 states are in position to fulfill all the conditions of government and can avail 2% of GSDP as extra borrowing. Hence out of Rs 4.28 lakh crore, it believes that only Rs 3.13 lakh crore (73% of total available) might be actually borrowed by the state governments in FY21.  Till August 18, all states together borrowed Rs 2.5 lakh crore.

Besides, the central government has recently released GST Compensation for FY20 at Rs 1.65 lakh crore. To release the GST compensation for FY20, balance of cess amount collected during FY18 and FY19 was also utilised, which indicate that the Centre does not have the cushion of funds, to even compensate for the shortfall in revenue owing to GST, the report said.

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Both the Centre and states are struggling due to the dried-up cash inflow but the states are the most vulnerable as they have limited source of own tax revenue.

Another way to bride the gap is a direct transfer of the combined full amount of Rs 54,000 crores from State Disaster Response Fund (SDRMF) and National Disaster Response Fund (NDRF). The fund transfer to states will support also health, immediate payment to contractors for infrastructure work to reduce the stretched working capital cycle which will also have employment and demand boosting properties, the report said.

"An endeavor should be next made to transfer at least 50% of the remaining Rs 2.5 lakh crores through further hike in WMA limits and supporting additional borrowing of states through Open Market Operations by RBI and relaxing some of the conditional ties associated with borrowing," SBI report said.