GST Impact on revenues of Karnataka state

Based on data for FY 2014-15 the impact of GST on the tax revenues for the state of Karnataka is analyzed as below:

FY 2014-15 Tax Revenue for the state of Karnataka
Tax Type	Collection (Crores)	Remarks
VAT	28,487	Half of this revenue will have to be shared with Central government under GST.
State Excise	13,801	Revenue resulting from Excise duty on alcohol not to be subsumed under GST in initial phase.
Stamps & Registrations	6,226	Not subsumed under GST
Sales Tax	7,865	Predominantly applied on petroleum products, not to be subsumed under GST in initial phase.
Entry Tax	3,042	Charged @2% on selected notified goods entering the state. To be subsumed under GST
CST	2,084	Central Sales Tax charged on interstate sales, although levied by centre is shared to respective state as per prevailing practice. To be subsumed under GST
Profession Tax	847	Not subsumed under GST
Luxury Tax	347	Subsumed under GST
Entertainment Tax	195	Subsumed under GST
Betting Tax	167	Subsumed under GST
Electricity Tax	504	Not subsumed under GST

Revenue not impacted by GST:

As is evident from above, out of total tax revenues of Rs 63,565 Crores for FY 2014-15, nearly 46% or Rs 29,243 Crore will not be impacted by GST. However a significant part of this (related to alcohol and petroleum products) amounting to Rs 21,666 will get subsumed under GST at a later date to be decided by GST council.

Revenue impacted by GST:

Due to subsuming of Entry Tax, CST, Luxury, Entertainment and Betting tax revenue to the extent of 9 % of total or Rs 5,835 Crores will have to be foregone by state under GST. However GST would replace Luxury/Entertainment/Betting/Lottery tax and Karnataka would get the SGST component. However significant component comprising of Entry Tax and CST Rs 5,126 Crores (88%) will be lost.

Tax on Goods (VAT):

Under GST, states will have to share ~ 50% of revenue from supply of goods with the centre. This would mean an approximate impact of Rs 14,244 Crores.

Total Impact: Rs 5,126 + 14,244 = Rs 19,370 Crores

Will GST compensate?

The central government has assured that states will not lose out on revenue due to introduction of GST because of reasons such as:

• ·         States will get share of services hitherto taxed only by centre
• ·         Higher effective tax rate in comparison to VAT
• ·         Increased tax base than that prevailing currently
• ·         Reduced leakage due to adoption of IT enabled processes
• ·         More control on input credit and refunds
• ·         Very few exemptions (commodities/area/party related)

Also the centre would compensate the states for any revenue loss over a period of 5 years with phased support (100%, 75%, 50% so on..). Let us examine these factors in detail.

1.      Impact of Tax rate:

VAT Regime:

Approximately 35% revenue is from goods charged at lower rate of 5.5% and 65% from higher rate of 14.5%. The effective weighted average rate is thus around 11%. Half of this revenue will have to be shared with Central government under GST. However, part of VAT revenue resulting from taxing of tobacco products will not be subsumed in GST. Current earnings of Karnataka from VAT of Rs 28,487 Crore at an effective rate of 11% implies a taxable turnover of Rs 2, 58,973 Crores.

GST Regime:

The Revenue Neutral Rate of 15 to 15.5% implies a standard rate of 18% , lower merit rate of 12% and demerit or sin rate of 40% (Ex: for tobacco/soft drinks/luxury cars/carbon tax). With fewer exemptions and very few commodities under lower rate (bullion, agriculture implements etc.) the weighted average effective GST rate is likely to be significantly higher at around 16%. This if evenly split, would mean 8% each for centre and state. This from state perspective is still lower by 3% from the current prevailing effective rate of 11%.

Impact:

On a taxable turnover of Rs 2, 58,973 Crores, @ 8% the revenue accruing to Karnataka would be Rs 20,718 Crores. Hence the net negative impact would be of Rs 7,769 Crores. Implying, due to a higher effective rate of 16% under GST, despite sharing 50% revenue with centre the revenue of Karnataka state would fall only by 27% (and not 50%).

2.      Impact from elimination of cascading Effect:

In case of manufactured products, VAT is calculated on an assessable value arrived at after applying Excise duty. Implying on a product worth Rs 100, Excise duty at 12.5% is applied and subsequently VAT rate of 14.5% is calculated implying an effective rate of ~ 16%. Under GST as both would be merged at standard rate of 18%, the share of Karnataka would be 9% against the prevailing effective rate of 16%. Revenue will thus get impacted due to elimination of double taxation.

Excise revenue generated from Karnataka is ~ 14,503 Crores (As Excise revenue is not collected based on state geographies, the revenue collected by all Excise Commissionerate falling in Karnataka has been considered). Considering a tax base of ~ 1, 17,335 Crores the VAT revenue that is getting generated currently is ~ 19,116 Crores at an effective rate of ~16% (as VAT is calculated on top of Excise duty). However in GST regime, Karnataka will get SGST component calculated at 9% (considering standard rate of 18%) of tax base (excluding Excise duty) leading to a revenue of Rs 10,560 Crore meaning a net negative impact of Rs 8,556 Crores. Similarly central government will derive a revenue of Rs 10, 560 Crores (CGST) in lieu of Rs 14,503 Crores earned currently.

Hence, net impact from elimination of cascading effect for Karnataka Rs 8,556 Cores.

3.      Gain from taxing of Services:

Karnataka or any state does not have to constitutional powers to tax services which will change with GST. With the pruning of negative list over the years revenue from services has grown and has now equaled the revenue from excise (manufacturing). The approximate Service Tax Revenue generated from Karnataka in FY 2013-14 is Rs 7,800 Crores. Adjusting for higher rate (18%) under GST the revenue is likely to be Rs 11,359 Crores and share of Karnataka would be Rs 5,680 Crores.

4.      Gain from elimination of exemptions:

Under the GST regime the number of exemptions is proposed to be minimal, be it area based exemptions, commodity wise exemptions, sector/industry based exemptions etc. The loss of revenue on account of exemptions prevailing in Central Excise is equivalent to the revenue generated for the financial year 2014-15 at Rs 1, 84,764 Crores. The additional Revenue that can thus be generated from Karnataka even if 80% of the exemptions are eliminated would lead to revenue accrual to the tune of ~ Rs 16,128 Crores of which state will earn SGST of Rs 8,064 Crores.

Summary:

Impact of GST on indirect Tax Revenue of Karnataka (Rs Crores)
Current Total Tax Revenue of Karnataka		63,565
Loss of Revenue due to subsuming of Taxes (Entry Tax, CST, Betting, Luxury, Entertainment etc.)	-5,835	-22,160
Loss of revenue due to sharing of tax on goods with centre	-7,769
Loss of Revenue due to elimination of cascading effect	-8,556
Gain due to share from services revenue	5,680	+13,744
Gains due to elimination of exemptions	8,064
TOTAL		55,149

Karnataka not being a major producing state the impact of destination-cum-consumption based theme of GST has not been considered. Net impact for Karnataka would hence be a revenue loss of Rs 8,416 or a reduction of around 13%.

There would be several other benefits resulting from the GST process:

1. ·         The threshold for Central Excise is likely to come down from prevailing Rs 1.5 Crore turnover to around Rs 10 Lakh turnover under GST thus expanding the tax base.
2. ·         Establishment of ITC chain will result in lesser tax evasion. (In several high risk commodities like marble, plywood, bullion, garments etc. the evasion is up to 60%)
3. ·         IT based provision for Input credit matching (only if corresponding sale has been reported) would eliminate significant leakage.
4. ·         Every year there is a growth in tax revenue in 8-10% range.
5. ·         GST is likely to boost GDP of India by 100 to 150 bps resulting in increased tax revenue.

Considering the above benefits the negative impact on revenue of state would be likely to be restricted to the range of ~ 10 to 12%. Elimination of various exemptions prevailing currently is the key to this, in the absence of which losses could increase to as high as 25-30%. 

(Views expressed are strictly personal, does not represent any government agency or department. Information provided is entirely based on publicly available data)