ZT Economic Analysis Team

Goods and Services Tax (GST) implementation in Jammu & Kashmir was long expected to be a mixed story of loss and improved tax efficiency. 

How far has the introduction of GST to Jammu & Kashmir helped the state beef up its own revenue base? How far has the state compromised its autonomy and flexibility in designing its tax architecture?

This week Ziraat Times, drawing from diverse data from official sources like the RBI and J&K’s own budget and other documents comes up with an exclusive report on the impact of GST on tax autonomy of Jammu & Kashmir. 

J&K’s own revenue post GST:

Implementation of GST  was long expected to reduce the autonomy of states on their revenue. In 2018-19 Jammu and Kashmir state’s own GST revenue as a percentage of total revenue is expected to be only 6%, while 79% of the total revenue is expected to be in the form of central transfers.

This situation as per experts, is fraught with consequences for its political elbow room-lower own revenues, naturally, are known to translate into lesser degree of flexibility in making locally relevant expenditures.

Jammu and Kashmir is one of the few states in the country which is expected to witness a sharp decline in the share of its tax receipts in the total revenue with GST implementation.

J&K’s own revenue post GST

As seen in the attached graph, Jammu and Kashmir’s own taxes as a percentage of revenue from 2015-2018 is estimated to decrease by nearly 5 percentage points.

Share of own tax receipts in revenue could change for some states with implementation of GST

Many goods and services which were earlier taxed either by the states or the center are now subjected to GST by both. Also, earlier, states used to get tax revenue from the sale of goods and services in their jurisdiction.

At present, the revenue generated by levying GST is split equally between the centre and the destination state, to where the goods and services are supplied by the sellers. As a result of the changes in taxation structure, the share of own tax receipts in revenue is estimated to change for some states.

While the proportion is estimated to increase for Tamil Nadu, own tax revenue proportion is estimated to gradually decline for all other states. There could be a drop of nearly five percentage points for states such as Bihar, Gujarat, Jammu and Kashmir, and Karnataka.

The dependence on these sources is more than 85% of the revenue in the case of Bihar, Jammu, and Kashmir, and the north-eastern states (except Assam). However, this is more so because of their significantly higher reliance on central transfers.

Compensation expected by states for loss of revenue due to the implementation of GST

The Goods and Services Tax (Compensation to States) Act, 2017 provides for compensation to the states for any loss of revenue arising due to the implementation of GST. 

Compensation grants in case of 15 out of 27 states could be clearly ascertained from their 2018-19 budget documents. As per the Act, states are liable to receive compensation only for five years from the date their state’s GST Act came into force. 

Compensation expected by states for loss of revenue due to the implementation of GST

It implies that the states receiving compensation have only this much time to bridge this gap with other avenues to avoid any potential loss of revenue. This gap is quite significant for states like Gujarat, Karnataka, and West Bengal (6-7.5% of their revenue receipts). When petroleum products are brought under GST, the gap could widen.

Interestingly, as seen from table 2, Jammu and Kashmir’s GST compensation grants in 2018-19 is expected to be to the tune of Rs 3175 Crore, which is only 4.9% of its total revenue.

That goes to demonstrate that the quantum of compensation is now lower as compared to the quantum of its own tax revenue pre- GST period.

State of J&K’s non -tax revenue post GST

According to the data analyzed by Ziraat Times, non-tax revenue of states is growing faster than GSDP for 13 states; growth varies across states. When it comes to all-India level, own non-tax revenue has been the source for 8% of states’ revenue, on average, during 2011-19. States earn non-tax revenue through various sources, including interest earned on loans provided by states, dividend from public sector enterprises, licensing fee for mineral exploration, and fee levied in relation to forestry, among others.

State of J&K’s non-tax revenue post GST

While the average growth rate in own non-tax revenue of states has been 12%, the growth is primarily because of higher growth rate in a few states, such as Punjab, Kerala, and Bihar at 33%, 28% and 26%, respectively. Including these, 13 states have growth rates higher than their GSDP growth rates. In Andhra Pradesh and Sikkim, own non-tax revenue decreased at a rate of 10%, due to lower interest receipts and lottery receipts, respectively.

In case of Jammu & Kashmir, as seen from figure 21 between 2011 and 2019, while own tax revenue constitutes 18% of the total revenue, non-tax revenue comprises of 9% of its total revenue.