GST Regime Proving To Be Troublesome For States

Since implementation, the Goods and Services Tax appears to have reduced the resource-generating capacity of States and has contributed to worsening inter-State inequality

- CP Chandrasekhar & Jayati Ghosh

Two years after its implementation, the extent to which the Goods and Services Tax (GST) regime is an improvement upon the earlier system of multiple excise and sales taxes remains unclear. As of now, there are several worrying trends. The first is that gross GST collections are short of expectations. Thus, as against a target of 1,12,000 crore, a month set for 2018-19, average GST revenues fell short of 1 lakh crore a month in that year.

The shortfall is a problem especially for the States, because while they have given up a significant part of the taxation powers they had earlier, they will be compensated only for five years (using revenues from a special cess) for any shortfall in revenues relative to a projected revenue growth target of 14 percent per annum.

Second, while month-wise gross GST collections (relative to the corresponding month of the previous year) have been rising almost consistently over time (Chart 1), collections by or due directly to the States have been quite volatile and have not displayed the same consistent rise (Chart 2). That is, the GST revenue accruing to the Central divisible pool is doing better than that received by the States from the State GST (SGST) and Integrated GST (IGST). This raises concerns about what the revenue position of the States would be three years from now when the five-year transition period would come to an end.

States’ revenues

Finally, while many States seem to be losing out as of now with regard to the minimum revenue growth targeted after the move to the GST regime, the new structure of indirect taxation seems geared to accentuate interState inequalities.