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With economic activity at a standstill due to the lockdown, the total taxes collected by the Centre and state governments are bound to be impacted. As state government taxes are more consumption-oriented, they are feeling a greater pinch. Mint takes a look.

Why are state govts’ tax collections down?

Sales tax/value-added tax (VAT) on petroleum products (petrol, diesel, etc.) is one of the major ways through which state governments collect tax. In 2018-19, the total sales tax/VAT collected by them on petroleum products was 2.01 trillion (see chart), making up around 16% of the total 12.61 trillion in tax revenue collected by state governments that year. In the first nine months of 2019-20, the total sales tax/VAT collected by state governments on petroleum products was 1.44 trillion. This is unlikely to cross the 2018-19 collections as consumption of petroleum products has slowed dramatically.

Graphic: Paras Jain/Mint
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Graphic: Paras Jain/Mint

How have petroleum products been faring?

This March, overall consumption of petroleum products was 17.8% lower year-on-year. Petrol and diesel consumption were down 16.4% and 22.2%, respectively. This was when India was in lockdown only for part of the month. The consumption in April may crash given that the country has been in lockdown for the entire month. This will make things tougher for states. Also, consumption won’t recover to previous levels even if the lockdown ends in early May, as people may not venture out as much as before. Aviation turbine fuel consumption too fell 32.4% last month. April numbers will only be worse.

How will real estate impact state govts’ tax collections?

Another big money-spinner for state governments is taxes on real estate transactions, which have more or less come to a halt. In 2019-20, state governments had hoped to earn a total of 1.60 trillion from taxes on property and capital transactions. This target will be difficult to achieve now. Also, 2020-21 collections will take a beating.

What else will affect states' tax revenues?

Taxes on sale of alcohol are a major source of revenue for states. The Confederation of Indian Alcoholic Beverage Companies (CIABC) said that since the lockdown began, state governments have lost 20,000 crore in taxes, which they would have otherwise earned through the sale of alcohol. According to CIABC, alcohol contributes nearly 2 trillion to state governments’ coffers during a fiscal. Permitting alcohol sale, at least through home delivery, could be a means for state governments to continue earning some money.

Is the central bank helping state govts?

The Reserve Bank of India (RBI) has raised the ways and means advances cap of state governments by 60% to 51,560 crore till 30 September. Section 17(5) of the RBI Act allows the central bank to lend to states to the extent that they repay the loan “not later than three months from the date" when the advance is made. But things will hardly change much in three months. So, the Centre needs to do more to help states, starting with allowing the sale of alcohol.

Vivek Kaul is a Mumbai-based economist.

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