India Ratings and Research Private Ltd (India Ratings) expects that around 11 states will require a compensation of Rs 9,500 crore under the goods and services tax (GST) regime in the current financial year, subject to meeting certain assumptions.
The sum is way below the generally-talked amount of Rs 50,000 crore.
India Ratings' chief economist Devendra Pant says GST revenues of all states combined will grow at a compounded annual growth rate (CAGR) of 16.6 per cent in FY18 over FY16's CAGR figure.
However, since the picture differs across states, around eight states-- Andhra Pradesh, Chhattisgarh, Gujarat, Himachal Pradesh, Madhya Pradesh, Odisha, Punjab and Tamil Nadu --would need compensation from the central government for any revenue loss under baseline scenario.
"This would cost Rs 5,600 crore to the central government in FY18," says Pant.
As a post-GST measure, input tax credit is available on both goods and services. India Ratings' calculation shows that the growth of GST component of states' own tax revenue for all states in such a case would drop to 15.5 per cent in FY18 (base line scenario 16.6 per cent) and three more states-- Goa, Jammu and Kashmir and Jharkhand- would require a compensation from the central government.
The total compensation amount, therefore, would increase to Rs 9,500 crore in FY18. This is based on the assumption that in the final production of goods and services, service tax accounts for 10%.
The GST Council has imposed cesses on aerated drinks, luxury cars and sin goods over the peak rate of 28 per cent to fund the compensation to states. States will get full compensation for the first five years of the GST roll-out, which means until the year 2021-22.
Overall, India Ratings says the GST implementation will have a positive impact on state governments' finances in the medium as well as long term. Even in the short term, the impact on aggregate state finances will be positive but India Ratings' calculations show that the picture varies across states.