Assessing state integration under GST

Despite expectations, state-level integration under GST shows only modest gains in the post-Covid period

- R KAVITA RAO

The issue of inter-state variations in revenue performance is often a matter of debate. The change in the tax regime from the earlier value-added tax (VAT) to the goods and services tax (GST) marked a transition from a source-based tax to a destination-based tax for states. In the previous regime, inter-state transactions were taxed by the exporting state, whereas now, the revenues accrue to the destination state. This change in the design of the tax regime was argued to shift the revenue to consuming states from producing states. Further, with the introduction of GST, states are expected to become more integrated, with larger volumes of inter-state trade.

To understand the impact of GST on this aspect of economic activity, we can explore the changes in the share of Integrated GST (IGST) settlements in the total revenue collection of states. IGST is the tax levied on inter-state transactions - the tax is collected by the Union government, with full input tax credit made available to the exporting state. This would mean that the exporting state does not get any revenue from this transaction. On the other hand, in the importing state, the importer can claim input tax credit against local sales, thus transferring the revenue to the importing state. The settlement of claims from IGST for individual states is sorted out through the IGST settlement mechanism. In effect, therefore, IGST settlement can be visualised as the tax on goods and services imported from other states, or even from the rest of the world.