Are States’ GST collections on track?

The need for shifting from the erstwhile VAT to Goods and Service Tax (GST) regime was felt because Value Added Tax continued to be complicated, cascading and inefficient. GST was seen as a game-changer as expectations were that it would increase the tax revenues of States by improving compliance, widen the tax net, and improve ease of filing by adopting better technology. How has the experience been so far?

GST collection for 20 major States during 2017-18 to 2019-20 has been taken for analysis; since 2020-21 was affected by the Covid-19 pandemic, it is not included. Since GST was not implemented at the beginning of a financial year, the data for 2017-18 has been annualised to get full financial year GST revenue collection.

The GST collection to GSDP (Gross State Domestic Product) ratio of States has been compared to assess the level of revenue collection effort of a State. Since ‘GSDP at current prices’ data for the financial year 2018-19 were not available for all States, GSDP data are taken for two years, namely 2016-17 and 2017-18.

The tax-GSDP ratio is calculated as the ratio of the average of GST collection (2017-18 to 2019-20) to the average of GSDP for two years, 2016-17 and 2017-18. Total GST (TGST) revenue for a State is the aggregate value of the State GST and remittance of Integrated GST to States for the value of inter-State inward supply goods and services and consumed in State boundaries.

States with higher SGST-GSDP ratio are Maharashtra (2.3 per cent), Goa (2 per cent), Haryana (1.9) and Gujarat (1.8), and with the lowest SGST-GSDP ratio are Bihar, Andhra Pradesh, Madhya Pradesh (nearly 1 per cent), and Punjab (1.1 per cent). The average ratio is 1.5 per cent.

The IGST-GSDP ratio of States varies from 0.5 per cent (Gujarat) to 1.57 per cent (Bihar), with the average being 0.99 per cent. While Uttar Pradesh has the highest rank in average SGST collection, it ranks second in the IGST-GSDP ratio. While Maharashtra ranks second in IGST collection, it ranks 16th in IGST-GSDP ratio. Bihar, on the other hand, stands eleventh in IGST collection but ranks first in IGST-GSDP ratio.

The Total GST-GSDP ratio for 20 States ranges from 2.15 per cent (Madhya Pradesh and Andhra Pradesh) to more than 3 per cent (Goa and Maharashtra); the average is 2.48 per cent. The chart shows that excluding Goa and Maharashtra, most of the States have more or less equal GST share in GSDP.

This suggests that, unlike the VAT regime, the GST share is more evenly distributed and no single State has benefited at the cost of others in the first three years of GST implementation. While Maharashtra ranked first in average GST revenue collection, and second in TGST-GSDP ratio, Goa stands first in TGST-GSDP ratio but ranks twentieth in average TGST collection.

Growth in GST collection

The growth in total GST collection of States in 2018-19 varied from -13.5 per cent (Delhi) to 42.5 per cent (Bihar). In 2019-20, the growth rate of States stabilised, ranging from 5.2 per cent (Rajasthan) to 22.9 per cent (Odisha). Average growth of GST collection in 2018-19 and 2019-20 indicates that Bihar, Assam, Jharkhand, Odisha, and Madhya Pradesh recorded the highest growth, while Maharashtra, Gujarat, Tamil Nadu, Kerala, and Delhi had the lowest growth. Also, while the poor States recorded the highest growth, the richer States had lower growth. The higher growth rate of these poor states is mainly driven by higher growth in IGST remittance revenue.

Since GST is a destination-based tax system, consuming States were expected to benefit more than producing States. States with more than 50 per cent share of IGST remittance in TGST from 2017-18 to 2019-20 are Bihar (62.3 per cent), Kerala (52.9 per cent), Uttar Pradesh and Andhra Pradesh (52 per cent each), Madhya Pradesh, and Assam (51.4 per cent). On the other hand, States with a higher share of SGST in TGST from 2017-18 to 2019-20 are Haryana and Gujarat (about 78 per cent), Maharashtra (75 per cent), Chhattisgarh (71.6 per cent), and Jharkhand (69.7 per cent).

The growth in GST revenue across States has been lower than expected. They are staring at a large revenue shortfall in the next two financial years and after the expiry of the compensation period in July 2022.

States need to step up their efforts in increasing both SGST and IGST collections. They need to adopt a roadmap for better GST governance in terms of scrutiny of GST returns, audit, and enforcement activities during the next three years. Similarly, the full-fledged operationalisation of the e-invoicing system will be a big boon for States.

If these interventions are implemented effectively, States could attain the protected revenue as envisaged in the GST (Compensation) Act and come out smoothly from the compensation net by 2023-24.

Santosh is an Assistant Professor and Ramalingam is an Associate Professor at Gulati Institute of Finance and Taxation, Thiruvananthapuram

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