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25 October 2016
The tax revenues of 16 states that account for 70% of all states' tax revenues remained sluggish during April to June quarter of FY2017, mainly acute shortage in tax collection, says a research report. The Total Investment & Insurance Solutions
In the note, Edelweiss Securities Ltd, says, "Among various sources of taxes—oil, land and other consumption goods—land tax collections are the weakest, up mere 4% year-on-year (YoY) during April-July 2016 compared to budgeted growth of 17%. Land prices are clearly under pressure and transactions have slowed, implying that households continue to face adverse wealth effect. Perhaps, this partly explains the continued weakness in consumption demand, especially in rural areas, despite a good monsoon." The Total Investment & Insurance Solutions
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During the first quarter, states' tax revenues growth increased by just 6% against budgeted growth of about 20% and 7% recorded in FY2016. In fact, states have been missing their tax targets for the past three years (see graph below). The weakness is broad based—reflected in land taxes, oil taxes as well as other consumption taxes; although, oil tax revenue, of late, is picking up given recovery in oil prices. This weakness in tax revenues does confirm that economic recovery is tepid and still not broad-based, the report says. The Total Investment & Insurance Solutions
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| Edelweiss-States’-tax-revenues-remain-sluggish 2(The Total Investment & Insurance Solutions) |
While maintaining that land taxes are the weakest link, Edelweiss says, the weakness in states' revenue collection is broad based. It says, "...oil taxes are in turnaround mode post a sharp plunge last year, given recovery in oil prices, and going ahead, this should improve further. However, other than land and oil taxes, the trend hints at weakness. While the full break up is not available, we estimate tax collection growth in excluding land and oil category to be slow at around the same level as FY2016 at around 6% to 7%." The Total Investment & Insurance Solutions
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According to the report, the trend plan expenditure is robust, states' have to face a huge burden of wages, especially the Seventh Central Pay Commission (CPC) payout. "It is encouraging to note that states are maintaining a robust pace of plan expenditure—running at a healthy about 29% YoY—although a tad slower than budgeted 32%. Moreover, many states have ramped up plan capex, again an encouraging development. However, the only caveat here is the impending burden of higher wage pay out under the 7th Pay Commission (some states may start this year, some may postpone to next) and in a scenario where tax revenues are not particularly robust, states will eventually face a tough choice of either reining in Plan expenditure or slipping on their budgeted fiscal targets," Edelweiss concluded.The Total Investment & Insurance Solutions
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