The revenues of the top 18 states in India, which collectively account for 90% of the country's gross state domestic product (GSDP), are projected to grow at a rate of 8 to 10% during the current financial year, reaching an estimated US$ 455.36 billion (Rs. 38 lakh crore). This information comes from a recent report by CRISIL Ratings. According to the report, the revenues of these states grew by 7% in the previous fiscal year.

This anticipated growth will be driven primarily by robust Goods and Services Tax (GST) collections and the devolution of finances from the Centre, which together constitute around 50% of the aggregate state revenues. While revenue from liquor sales—which makes up 10% of state revenues—is expected to remain stable, collections from sales tax on petroleum products and grants recommended by the 15th Finance Commission are projected to be modest.

Key Drivers of Revenue Growth

Senior Director of CRISIL Ratings, Mr. Anuj Sethi, highlighted that the most significant driver of revenue growth would continue to be aggregate state GST collections, improved tax compliance, and greater formalization of the economy. He stated that central tax devolutions are expected to grow by 12 to 13% in the current financial year, serving as a crucial driver of state revenues. Additionally, grants from the Centre are projected to grow by 4 to 5%, in line with the budget outlay.

CRISIL Ratings' projections assume a real GDP growth forecast of 6.8% for this financial year. This growth outlook is significant for state revenues as it underscores the broader economic environment within which states will be operating.

Importance of GST Collections

GST collections are a critical component of state revenues. Since the implementation of GST, states have relied heavily on this source of income. The projected increase in GST collections is attributed to improved tax compliance and efforts towards the greater formalization of the economy. These measures have helped broaden the tax base and enhance the efficiency of tax collection mechanisms.

Central Tax Devolutions and Grants

Central tax devolutions play a vital role in state finances. The expected growth of 12 to 13% in central tax devolutions is a positive sign for states, providing them with a more substantial financial base to support their expenditure needs. Grants from the Centre, though projected to grow more modestly at 4 to 5%, still represent a significant component of state revenues.

Challenges and Considerations

Despite the positive outlook, states must remain vigilant about the challenges that could impact their revenue growth. Sales tax on petroleum products, which has traditionally been a substantial revenue source, may see limited growth. Moreover, states must focus on enhancing their revenue collection efficiencies to ensure sustainable growth. This involves leveraging technology, improving administrative processes, and addressing compliance gaps.

The Role of the 15th Finance Commission

The 15th Finance Commission has recommended various grants to states, which will be an essential source of revenue. However, the growth in these grants is expected to be modest. States need to strategically plan and allocate these funds to maximize their impact on development and public welfare.

Strategies for Sustaining Revenue Growth

To sustain revenue growth, states must adopt a multi-faceted approach. This includes:

Expanding the Tax Base: States should focus on broadening their tax base by bringing more economic activities under the tax net. This can be achieved through better compliance mechanisms and targeted policies to formalize the informal sector.

Enhancing Compliance: Improved tax compliance is crucial. States should invest in technology and data analytics to track and reduce tax evasion. Simplifying tax processes and educating taxpayers can also help enhance compliance.

Leveraging Technology: States should leverage technology to improve tax collection and administration. This includes adopting digital payment systems, implementing robust IT infrastructure for tax administration, and using data analytics for better revenue forecasting and planning.

Public Awareness and Education: Educating the public about the importance of tax compliance and how taxes contribute to public services and infrastructure can help improve voluntary compliance.

Conclusion

The projected revenue growth for the top 18 states in India is a positive indicator of the country's economic resilience and recovery. Robust GST collections, central tax devolutions, and improved compliance are key drivers of this growth. However, states must continue to innovate and enhance their revenue collection mechanisms to ensure sustained growth and fiscal stability.

By focusing on expanding the tax base, enhancing compliance, leveraging technology, and educating the public, states can build a more robust and sustainable revenue system. This will not only support their financial needs but also contribute to the overall economic development and prosperity of the nation.