GST Revenue Declines for Most Indian States, PRS Report Shows; North-East States Improve

A report by PRS Legislative Research highlights a general decline in aggregate revenue for most Indian states from taxes that were merged into the Goods and Services Tax (GST) since its introduction in 2017. The study found that revenue from subsumed taxes as a percentage of GDP has decreased from 6.5% in fiscal year 2015-16 (pre-GST) to 5.5% in 2023-24. Furthermore, the average SGST (State Goods and Services Tax) as a percentage of GDP over the seven years of GST has been 2.6%, which is lower than the average of 2.8% collected from these taxes in the four full years preceding GST.

While states were initially guaranteed a 14% annual growth in SGST revenue and compensated for shortfalls until June 2022, the report shows significant variation across regions. Some North-Eastern states, including Meghalaya, Manipur, Mizoram, Nagaland, and Sikkim, have seen an increase in their subsumed tax-to-GSDP (Gross State Domestic Product) ratios compared to the pre-GST era, possibly due to GST's destination-based nature. Conversely, states such as Punjab, Chhattisgarh, Karnataka, Madhya Pradesh, and Odisha have experienced a more significant drop in their revenue from subsumed taxes relative to their GSDP.

The report also notes that the GST Council's recent decision to rationalize GST rates into standard slabs of 5% and 18%, with a special 40% rate for certain items, could potentially negatively affect SGST revenue.

Impact This news has a significant impact on state government finances, potentially affecting their fiscal health, spending capacities, and borrowing requirements. For investors, it signals possible economic headwinds and highlights regional economic disparities. It also raises questions about the overall effectiveness of GST in boosting state revenues and the sustainability of fiscal policies. Rating: 7/10

Difficult Terms: GST: Goods and Services Tax. A unified indirect tax system implemented in India in 2017, replacing multiple central and state taxes. Subsumed Taxes: Taxes that were replaced and included under the GST regime, such as Value Added Tax (VAT), Central Sales Tax (CST), Excise Duty, and Entry Tax. GSDP: Gross State Domestic Product. The total market value of all final goods and services produced in a state in a given period. SGST: State Goods and Services Tax. A tax levied by the state government on intra-state sales of goods and services. GST Compensation Cess: A cess levied to compensate states for any revenue shortfall in the first five years after GST implementation. Destination-based Taxation: A tax system where the tax is levied at the place where the goods or services are consumed, not where they are produced. Rationalisation of GST rates: The process of simplifying and standardizing the tax rates under the GST regime.