States' revenue growth to slide to 7-9% despite robust GST collections

States' revenue growth will slide to 7-9 per cent in FY23 even as handsome GST collections will help in the accretion, a report said on Wednesday. The revenue growth had galloped 25 per cent in FY22 courtesy a lower base in the pandemic-affected FY21, the report by rating agency Crisil, which analysed 17 states accounting for 90 per cent of the aggregate GSDP, said.
In FY23, healthy tax buoyancy will be supporting the revenue growth, with Goods and Services Tax (GST) collections and devolutions from the Centre -- which together comprise up to 45 per cent of the states' revenue -- expected to show robust double-digit growth, it said.

The agency's senior director Anuj Sethi said the biggest impetus to the revenue growth will come from aggregate state GST collections, which had already rebounded by 29 per cent in FY22.

"We expect this momentum to sustain and collections to further increase 20 per cent this fiscal, supported by better compliance levels, higher inflationary environment and steady economic growth," Sethi said.

A flattish or low single-digit growth in sales tax collections from petroleum products (8-9 per cent of total revenue) and grants recommended by the Fifteenth Finance Commission (13-15 per cent) will be acting as the moderating factors, it said.

The share of states in central taxes is expected to grow further this fiscal, the agency said, adding that while the proportions are determined by the Finance Commission, the overall kitty is linked with the central government's gross tax collections. This pool, which expanded 40 per cent last fiscal, should further grow by 15 per cent this fiscal, it said.

Fuel tax collections are expected to be almost unchanged because gains from a 25 per cent increase in crude price and better sales volumes will be offset by the reduction in central excise on petrol and diesel in November 2021 and May 2022, and sales tax cuts by some states.

Centre's grants, including Centrally Sponsored Schemes, Finance Commission grants and revenue deficit, are likely to see only marginal growth this fiscal, it said.

Additionally, GST compensation payments, which were 7-9 per cent of revenue in past two fiscals, will also end, with the expiration of the compensation period on July 1, 2022, it said.

The outlook is based on an assumption of real GDP growth at 7.3 per cent and no lockdown-related impacts, it said, adding that a slowdown in economic activity due to higher-than-expected inflationary pressures could negatively impact revenue.