By R Gopalan & MC Singhi
A major tax reform of a goods and services tax (GST) was introduced on July 1, 2017. It is a comprehensive, multi-stage, destination-based indirect tax that replaced numerous central and state-level taxes and subsumed central excise duty, service tax, additional duties of customs (countervailing duties and special additional duty), certain central cesses, and surcharges of the Union taxes and cesses on state value added tax, central sales tax, entry tax, entertainment tax (except by local bodies), purchase tax, and luxury tax of the states. It took 17 years to implement GST.
It was facilitated by a Union government guarantee of a minimum 14% annual growth on the comprehensive tax base for each state for five years. Besides creating a “One Nation One Tax” system, removing the cascading effect of taxes, and ensuring free movement of goods across the country, the two important factors that facilitated the decision of the states to join GST were a widening tax base and reduction in tax exported. Further, it was assumed that uniform countrywide taxes will not result in tax competition, ensure convergence of tax/GSDP ratio across the states, and result in greater tax buoyancy.
Revenue from GST
Overall gross revenue from GST has indeed been significantly buoyant, more so in the post-pandemic period. Overall GST revenue increased from 14,83,291 crore in 2020-21 to 22,08,851 crore in 2024-25 at an average annual rate of 18.1%. GST revenue increased from 5.73% to 6.68% of GDP during this period, giving an overall buoyancy of 1.33. The buoyant revenue has prompted the government to initiate second-generation reforms in GST in September to further simplify, rationalise, and reduce tax slabs. The outcome, in terms of revenue impact of the second-generation reforms, is yet to become visible.
GST revenue at the level of the states becomes crucial now as a higher growth in the post-guarantee period is critically important for fiscal consolidation and optimism on fiscal reforms. Two issues, therefore, need further elucidation. First, whether there is a convergence with regard to GST revenue/GSDP across the states; second, whether the GST system has been buoyant. Taking the post-pandemic period into consideration, we look at the gross revenue received from GST at the state level (including IGST revenue), the rate of growth over the last four years, and buoyancy of these receipts across the states. Instead of GST finally accruing to the states (post-adjustment and transfers), we have used the gross collections at the state level as provided by the GST Council and GSDP data from the ministry of statistics and programme implementation from 2019-20 to 2024-25 to see the extent to which the expectations of the states have materialised.
How does GST revenue vary across states?
Contrary to expectations, GST revenue/GSDP has varied across states. From a low of under 2% for Tripura, Mizoram, Manipur, and Nagaland, it has exceeded 7% for Sikkim, Jharkhand, Maharashtra, and Haryana. The ratio exceeded an average of 4.8% for 10 states, including mineral-rich Odisha, Chhattisgarh, and Jharkhand. The convergence of ratio was considered because all goods and services consumed at the final destination were considered in GST, and GSDP was a conventional proxy for consumption. The GST revenue/GSDP ratio seems to have a very low correlation with the level of income or the nature of originating income. Bihar has a very low ratio compared to even Uttar Pradesh. The ratio of Gujarat, Karnataka, Kerala, Tamil Nadu, Telangana, all better off States, is observed to be lower than Odisha and Jharkhand. Even if we compare the GST collections with per capita private consumption, the correlation is not very high.
Fortunately, for most states the observed annual growth of GST revenue is above 14%, while overall growth for all the states is 17.8%. With GSDP growth averaging 14.2%, buoyancy of GST revenue is around 1.25, though slightly lower than the buoyancy at the national level (GST at national level also include IGST and cess on imports), which partly has to do with lower GDP growth averaging 13.6, a good 64 basis points lower. We tend to believe that there may not be a case for compensation under GST 2.0 for loss of revenue.
There are, however, interstate variations. GST revenue growth has been around 10% for Himachal Pradesh compared to a high of exceeding 21% for Goa, Maharashtra, and Haryana. So is the case with GSDP growth, from a low of under 10% for Arunachal Pradesh and exceeding 15% for Bihar, Karnataka, Meghalaya, Uttar Pradesh, Gujarat, and Assam. The buoyancy of GST revenue was less than 1 for Assam (though GST collections grew by over 14%), Meghalaya, Chhattisgarh, Himachal Pradesh, and Tripura. The Northeast except Sikkim had low ratio of GST revenue to GSDP and lower tax buoyancy.
Overall, the shift to GST has been positive for most states and it has generally met expectations. It is a signal for further reforms and a move towards fewer rates. What is needed further is extensive use of technology to minimise leakages, reduce litigation, facilitate transparency and predictability, and cut transaction costs across all segments in the chain. There is, however, a need to improve revenue receipt/GSDP ratio for the states which are below the all-states’ average. There are state-specific reasons that need to be addressed.
The authors are former civil servants.
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