At first glance, the goods and services tax’s (GST) revenue buoyancy seems unproven yet, given that 31 of 34 states/UTs in the country reported a ‘revenue shortfall’ during the July 2017-March 2018 period — among the larger states, Bihar’s deficit was 38% and Madhya Pradesh’s 26% — and received compensation. But the picture is actually not all that grim as most of these shortfalls are against the so-called ‘protected revenue’; when compared with the relevant tax revenue growth rates of the states during the pre-GST period, the new tax, despite its teething troubles during the period, has already shown its potential to boost revenue. The five-year full-compensation mechanism under the GST ensures that the Centre will make good any shortfall in the states’ GST revenue from what a 14% annual growth (over FY16 base) would have yielded them.
But few states had experienced such a growth rate in the years that immediately preceded GST and so GST has actually been a boon for them (see chart). Also, the presumed shortfall itself is on the decline. Manufacturing states like Maharashtra and Tamil Nadu have little to cavil about GST as they have witnessed ‘shortfalls’ of just 3% each in the nine-month period mentioned above. With the GST revenue showing definite signs of picking up — the overall GST collections in April 2018 was Rs 94,016 crore as against July average of a little lower than Rs 90,000 crore — whatever notional revenue shortfall would also likely disappear in case of most states. A patent improvement in compliance, anti-evasion measures like e-way bill and (yet-to-be-introduced) invoices matching will help accelerate revenue. Outgoing chief economic adviser Arvind Subramanian wrote in FE recently, “The government itself produces estimates which show that compensation, although financeable from within the GST, has been substantial. But compensation from a legal perspective is quite different from compensation from an economic perspective.
The true measure of compensation is one that arises after all the revenues (from the unsettled integrated GST and the cess) are first allocated to the individual states. The fact that the unsettled IGST and the compensation cess are in a centralised kitty does not mean that they do not accrue to the Centre and individual states… Once all the GST taxes are allocated to individual states, we find that very few states should require compensation and that the sum of all these compensation amounts is between Rs 5,000 and 10,000 crore.” The states that have reported a revenue surplus from GST so far are Manipur, Arunachal Pradesh and Mizoram. Hilly states like Himachal Pradesh (42%) and Uttarakhand (39%) are among the ones with the highest shortfalls. The GST Council has released Rs 47,844 crore as compensation to the states during July-March period while the collection from the relevant cesses stood at Rs 69,360 crore.