GST Boosts State Revenue, But Widens Fiscal Divide

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AuthorIshaan Verma|Published at:
GST Boosts State Revenue, But Widens Fiscal Divide
Overview

A decadal CAG study confirms Goods and Services Tax (GST) implementation has significantly boosted states' own tax revenues, with average growth accelerating post-GST. However, this fiscal uplift is unevenly distributed, with leading industrial states reaping higher benefits while others lag. The report underscores growing regional fiscal disparities, concerns over the sustainability of this revenue surge, and its implications for India's fiscal federalism, raising questions about equitable growth and states' long-term fiscal autonomy.

### Fiscal Gains Amidst Divergence

The Comptroller and Auditor General's (CAG) comprehensive decadal study confirms that the Goods and Services Tax (GST) has substantially enhanced the own tax revenue efforts of nearly all Indian states. Pre-GST, states averaged a 10% annual growth in their tax revenues from 2013-14 to 2016-17. This rate accelerated to 11.7% between 2018-19 and 2023-24, a period that included the pandemic-induced economic contraction. This growth was achieved despite significant inefficiencies, cascading tax effects, and a fragmented indirect tax structure that plagued the pre-GST era, characterized by multiple levies like excise duty, VAT, and entry taxes [3, 5, 6, 30]. The introduction of GST aimed to unify these disparate systems into a single, national tax framework, thereby simplifying compliance and fostering a common market [4, 9].

While the overall revenue picture has brightened, the analysis reveals a critical divergence in performance. State Goods and Services Tax (SGST) has emerged as the predominant contributor to States' Own Tax Revenue (SOTR), often accounting for over 35-47% of total revenue [Source A]. However, the ratio of SOTR to Gross State Domestic Product (GSDP) has remained relatively stagnant, hovering around 6-7% for several years, indicating potential over-reliance on SGST and a possible decline in the buoyancy of other own tax revenue streams [10, 12, 35].

### The Uneven Revenue Harvest

The benefits of GST have not been equitably distributed across all states. Gujarat exhibited the steepest acceleration in revenue growth, while states like Telangana, Andhra Pradesh, Himachal Pradesh, Uttarakhand, and Kerala experienced deceleration [Source A]. This unevenness is further highlighted by recent data: major industrial and service-oriented states such as Maharashtra, Karnataka, Gujarat, Tamil Nadu, and Haryana continue to be the largest contributors to national GST collections, collectively accounting for a significant portion of the total revenue [30, 34]. These states are robust consumption and production hubs. Conversely, states like Jammu & Kashmir, Punjab, Chhattisgarh, Madhya Pradesh, and Odisha have shown lagging performance, with their GST revenues as a percentage of GSDP remaining lower than pre-GST levels [31]. This disparity raises concerns about regional fiscal imbalances and equitable economic development.

### The Forensic Bear Case: Sustainability and Autonomy Erosion

Despite the reported revenue growth, several underlying risks and challenges persist. A significant concern is the potential over-dependence on SGST, while other components of SOTR might be neglected or underperforming. Reserve Bank of India (RBI) reports and Finance Commission analyses have consistently flagged issues with the buoyancy of states' own tax revenues, excluding SGST, and have pointed to increasing reliance on central government transfers. This reliance has risen, with central transfers forming a substantial portion of states' total revenue [11].

The structure of fiscal federalism itself is under scrutiny. While GST aimed for cooperative federalism through bodies like the GST Council, it has also led to a perceived centralization of taxation powers, potentially diminishing states' fiscal autonomy [2, 14, 15]. Many states have voiced concerns over revenue uncertainty and the impact of decisions made by the GST Council on their financial independence [17, 31]. Furthermore, the phasing out of revenue deficit grants, as recommended by recent Finance Commissions, poses a significant challenge for fiscally stressed states, which may struggle to manage their deficits without continued central support [18, 25]. The aggregate revenue from subsumed taxes, as a percentage of GDP, has also reportedly declined in the post-GST era compared to pre-GST levels, questioning the overall efficiency gains for states [30, 31].

### Fiscal Federalism in Transition

Looking ahead, the path for India's fiscal federalism remains complex. The recommendations of the 16th Finance Commission are introducing further transitions, with some states seeing shifts in their share of central taxes, while revenue deficit grants are being phased out [19, 25]. The continuous debate around the inclusion of cesses and surcharges in the divisible tax pool by the Centre, which are not shared with states, also remains a point of contention [8, 10]. The challenge lies in balancing centralized revenue collection mechanisms with the imperative of strengthening state fiscal autonomy and ensuring that the benefits of economic growth are shared equitably across all regions. The ongoing evolution of GST and fiscal transfer mechanisms will be crucial in shaping India's financial landscape for the coming years.

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