GST revenues falling short in key states. Here’s what the data really shows

Several states have found it difficult to maintain the revenue share of goods and services tax (GST) in nominal GSDP after indirect taxes were subsumed into the GST in the base year of 2015-16, a new working paper by the National Institute of Public Finance and Policy has revealed. 

It has also noted that there is a need to explore options for increasing states’ revenue base by examining new tax sources and investigating innovative areas of taxation.

“Analysis of this paper shows that, apart from a few years and states, State GST collection (including Integrated GST settlement on the SGST account and excluding GST compensation receipts) as a percentage of nominal GSDP falls short of the revenue subsumed into the GST in the base year of GST, 2015-16, as a percentage of the then-nominal GSDP,” it said, adding that GST compensation was vital in sustaining the state revenue stream that is subsumed into the GST.

“Even with GST compensation, some states and in some years were not able to maintain the share of revenue in GSDP that was subsumed into the GST in the base year (2015-16),” it further noted. 

The working paper “Reflecting on the Past to Plan the Future: Revenue Performance Evaluation of Indian GST” by Sacchidananda Mukherjee, Professor at NIPFP, has analysed the state-wise collections of state GST and GST compensation receipts taking 2015-16 as the base year and has studied the revenue collections from 2018-19 to 2023-24.

“The objective of this paper is to assess the revenue performance of states in the GST from 2018-19 to 2023-24. It is expected that states will generate revenue, as a percentage of nominal GSDP, from the State GST (without compensation) at least equal to the revenue included in the GST in the base year 2015-16,” it said.

The paper has noted that it will be important to evaluate the performance of states in generating revenue from the SGST in the coming years, when there will be no payments of GST compensation arrears.

It has also looked at ways of enhancing the revenue performance of states and has underlined that apart from expanding the tax base, improving tax efficiency and compliance are crucial for generating more revenue.

An assessment of the revenue potential of states within the GST could be helpful, it said, adding that addressing revenue leakages through information-driven, targeted interventions by the tax administration is essential.

Moreover, there is a need to explore options for increasing states’ revenue base by examining new tax sources and investigating innovative areas of taxation such as storage and usage of digital information, online video sharing, robotics. The taxation system could also address externalities related to the environment, biodiversity, health, and activities and entertainment having financial risks, it has recommended.

The paper has also noted that the revenue shortfall faced by some states could be structural, linked to the economic framework and/or natural resource endowment, such as minerals, fossil fuels, forests, and waters.

Noting that it is unlikely that the GST framework can address all the structural issues related to the revenue shortfall of states, the paper has said it will be important to explore the possible scope for internalising production and consumption stage externalities within the design and structural features of the GST. Further, designing an additional GST, in lieu of GST compensation cess, on commodities that currently attract a GST cess, may be desirable after March 31, 2026