GST India: Impact on Manufacturing State Revenue

The impact is assessed below using case study of Haryana state.

Haryana:

The state of Haryana with its proximity to the NCR has been promoting industries in the state through a slew of area based and industry based schemes and incentives.  Haryana is a hub for automobile industry (cycles, cars, bikes and tractors) with bigwigs like Maruti, Suzuki, Escorts and Hero amongst others having set their base. A number of telecom (Alcatel, Bharti) and white goods manufacturers (Whirlpool, Sony etc.) as well as leather, fans, machinery businesses also coexist (JCB, Yamaha, ABB, Asian Paints etc.). Major industrial cities are Faridabad, Rohtak, Gurgaon and Panipat. Service industry comprises of IT service companies (NIIT, HP, IBM, Dell Convergys etc.) predominantly located in Gurgaon. Textiles (blankets), carpets and even heavy industries (IOC, NTPC, and National Fertilizers etc.) are also not uncommon.

Why Haryana promotes manufacturing?

Various states like Haryana promote trade and industry within the state for following reasons:

1.     Promote economic prosperity of the state (GSDP), leading to higher per capita earning and elimination of poverty.

2.     Job creation for the unskilled and semi-skilled workers.

3.     Eliminate regional biases within the state by promoting industry hubs across various regions of the state.

4.     Provide alternate earning sources to rural youth over-dependent on agriculture.

5.     Earn tax revenue from the established industries and from other ancillary businesses supported by them.

Popular Schemes:

1.     Quick / time bound, online, single window clearance to industries for setting up in the state.

2.     Tax holidays

3.     Ready availability of land (land banks) with road / rail connectivity and supply of water, electricity and gas.

4.     Skill Development University setup by government to train rural youth.

5.     Special incentives for rural BPO, non-polluting industries (IT-BT), MSMEs etc. through measures like refund of VAT, stamp duty, rebate on power tariff etc.

Impact of GST:

The manufacturing states have been getting significant revenue from industries established in the state but supplying to rest of India by way of CST revenue which ranges from 5-8% of total tax revenue (Table below). From intrastate sales the state gets VAT revenue. CST (Central Sales Tax) though levied by centre, is collected and utilized by states from where the supply originates.

State	Total Commercial Tax Revenue	CST Revenue	CST %
Karnataka (2013-14)	36,773	1,897	5.1%
Tamil Nadu (2014-15)	72,326	3,500	4.8%
Maharashtra (2014-15)	75,783	5,650	7.45%
Gujarat (2011-12)	33,156	3,943	11.9%
Haryana (2014-2015)	19,930	1,415	7.1%

                                                                                                                                                                                                                                                   

 GST being a destination based consumption tax the revenue resulting from interstate transactions (IGST) will accrue to the consuming state. Thus, the manufacturing states will be at a loss. To counter this, GST has proposed a 1% non-creditable tax over and above IGST for a limited period on all interstate transactions which will in turn be reversed to the producing state. However there is a counter argument that the share of Excise and Service tax revenue would compensate for loss in CST. Besides, the non-creditable nature of additional tax would lead to cascading of taxes, against the principles of GST. Most CST sales are against C-Form at a concessional rate of 2%, however under GST, the rate of SGST in IGST will likely be at 8-9% (assuming IGST at 16-18%) thus compensating for any revenue loss. With centre compensating states for 5 years for revenue loss under GST, the concern stands well addressed. Haryana will also benefit from SGST component of IGST applied on all imports. Due to huge manufacturing base, imports into Haryana will also be significant. Haryana being one of the major agricultural producers, earns over Rs 1,000 Crore from purchase tax which will get subsumed under GST, meaning half of this (500 Crore) has to be shared with centre.

Positives:

• ·        50% share in Excise and Service Tax Revenue
• ·        VAT on petroleum products continues to be under state
• ·        Revenue from state excise (on alcohol / opium / hemp) would continue to be under state control
• ·        Revenue from Stamps and registration will be under state
• ·        Electricity will continue to be taxed by state
• ·        IGST on imports (SGST component) will accrue to Haryana state

Negatives:

• ·        50% of VAT revenue will have to be shared with centre
• ·        50% of revenue from purchase tax will have to be shared with centre
• ·        Will lose out on CST revenue accruing currently from interstate sale of goods
• ·        IGST (SGST component) revenue will go to consuming state
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• Break-up of Tax Revenues (2013-14)

Revenue Type	Rs (Crores) (B.E)	Percent Contribution
VAT	18,515	62 %
CST	1,415	5 %
State Excise	4,350	14 %
Stamps & Registration	3,950	13 %
Others (Entry Tax, Electricity, Tax on Vehicles etc.)	1,692	6 %
Total	29,922 (Est.)	100

While ~ 33% of revenue will be unaffected (State Excise, Stamps & Registration and Electricity etc.), Haryana would be required to share half of the revenue from VAT/CST (excluding petroleum). But, approximately 1/3^rd of VAT revenue (out of Rs 18,515 Crore) is from petroleum products which will not be subsumed under GST (i.e Rs 6,172) is safe. From the remaining revenue of Rs 12,343 Crores approximately half of it has to be shared with centre that is Rs 6,172 Cr. Haryana will also not get CST revenue of Rs 1,415 Cores. Thus total negative revenue impact will be Rs 7,587 Cr.

Now important question is whether 50% share in Central Excise and Service Tax generated from Haryana will be able to compensate this loss. Excise and Service Tax revenue data is not maintained state wise (but Commissionerate wise which are not restricted to any state geography) and hence difficult to arrive and precise revenue implication. However based on Haryana GSDP contribution to National GDP which is at 3.5%, the estimate of Central Excise and Service Tax Revenue generated from Haryana state can be estimated at roughly Rs 20, 897 Cr (3.5% of 5.97 Lakh Crore). At half the value it would be Rs 10,449 Cr.

Other Considerations:

• ·   However important crux is currently VAT (Ex: 14%) is calculated on top of Excise (12.5%) leading to an effective rate of ~ 28%. However under GST the standard rate is likely to be around 18%.
• ·    Currently for states nearly 1/3^rd of the revenue is from commodities taxed at lower rate (4-5%) and 2/3^rd from higher rate (14-15%), this breakup also needs to be analysed under GST.
• ·   The turnover threshold for VAT registration in Haryana is Rs 10 Lakhs which under GST is likely to be Rs 25 Lakhs affecting the tax base, hence impact needs to be analysed.
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•  Overall Haryana or any producing state appears to lose out marginally on revenue unless compensated adequately. However, in the long run due to increased tax base, reduced leakage states could benefit from GST. 
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• (Views expressed are strictly personal)