High debt to negate impact of high GST registrations in West Bengal

West Bengal has seen a surge in new Goods and Services Tax (GST) registration after its roll out. The state has topped the list of new registrations at around 200,000 new registrations since the roll out of GST on July 1. According to senior tax officials, one of the reasons behind the surge was the fact that traders involved in businesses like medicine shops, textiles, jewellery and wood work, among others, who were not in the tax net earlier, are now under GST network.

The total number of assesses under the value added tax (VAT) regime in West Bengal was close to 98,000, according to rough estimates. Thus, post-GST, an addition of two lakh new tax payers is expected to add significantly to the tax kitty of West Bengal.

However, much of the positive impact of anticipated higher tax collection is expected to be negated by the high debt burden of the state. West Bengal is likely to gain from GST, as it is consumption driven state.

Over the last few years, the West Bengal government itself has successfully increased its own tax collection through better compliance. In the year 2017-18, the West Bengal government has projected its own tax collection at around Rs 55,787 crore, against Rs 48,927 crore last year, a rise of about 14 per cent. In fact, in the last five years, West Bengal has seen nearly 50 per cent increase in its own tax revenue collection. In 2012-13, West Bengal's own tax revenue was around Rs 32,808 crore.

Notably, against the projected own tax collection of around Rs 55,787 crore, the state's loan repayment burden (principal plus interest) for 2017-18 is about Rs 45,350. In fact, West Bengal's debt servicing burden itself (counted as revenue expenditure) is about Rs 26,243 crore, or little less than half of its own revenue collection.

"West Bengal has been in a vicious debt trap and has been using market borrowing for loan repayments. "We are borrowing Rs 40,000 crore within which we have to refund Rs 28,000 crore as interest," according to Amit Mitra, finance minister West Bengal, in an interview in 2015 posted on the website of All India Trinamool Congress. This year, West Bengal's market loans is pegged at around Rs 44,484 crore, and its outstanding debt is expected to be around Rs 36,6085 crore, one of the highest among all states.

"Compared to earlier years, West Bengal is much better in aspects like improving revenue deficit to GSPD. However, the problem with West Bengal is its huge debt burden. Apart from improving tax efficiency, it needs to go for pinpointed subsidy, and not across the board," says Devendra Kumar Pant, chief economist at India Ratings.

What is more worrying for West Bengal is the upcoming high-interest debt repayment schedule. The state's repayment burden on account of market loan alone would increase from Rs 3,200 crore in 2016-17 to about Rs 11,610 crore in 2017-18. In fact, on an average, the share of market loans or state development loans for West Bengal in its total debt burden has been close to Rs 3,000 crore every year. Also, West Bengal's market loan repayment obligation would be the highest among all states in 2017-18.

It may be recalled, in 2003, the central government had announced a debt-swap scheme, which allowed state governments to replace high-cost borrowing with lost cost ones from small savings pool and market borrowing. However, that time West Bengal did not participate in the scheme. Moreover, Starting 2007, states have been borrowing heavily through market loans. The borrowings were mostly through state development loans, which were of ten-year maturity, and mostly subscribed by public sector banks and other government undertakings.

"Normally in case of IGST consuming states gain, and West Bengal is likely to be a gainer with GST," according to Dipankar Dasgupta, a former professor at Indian Statistical Institute.

West Bengal's revenue deficit as a percentage of GSDP has been coming down due to tax collection efficiency. From around 2.1 per cent in 2014-15, it is expected to be zero this financial year, according to Reserve Bank of India data.