Centre's sacrifice for cooperative federalism

It has now been seven years since the Goods and Services Tax (GST) was introduced.

- VARUN AGARWAL, JOSH FELMAN, THEERDHA SARA REJI & ARVIND SUBRAMANIAN

The transitional compensation mechanism has expired; the loans taken during Covid will soon be repaid; and the fate of the compensation cess needs to be decided. So now is a good time to review the GST's revenue performance and assess its future.

Our new research yields some findings that are relevant for the debate over the GST's future. In particular, it shows that the Centre has forgone substantial revenue over the past seven years, a contribution that has been overlooked in the often-heated discussion of GST performance. Until now, this contribution has neither been quantified, nor (perhaps for this reason) has it been generally appreciated.

The under-performance of GST revenues is key to understanding the extent of the Centre's contribution. As a result, the states have tapped the revenue guarantee that the Centre provided at the time of the tax's inception. This was done to convince the states, naturally anxious about giving up some fiscal sovereignty, to agree to the reform. And this, in turn, has meant that less GST revenue has flowed into the Centre's coffers.

Start with the data on GST revenue. It is true that gross collections have been extremely buoyant over the past few years (black line in Figure 1). But as we first pointed out last December in these pages, the more relevant net revenuesGDP ratio (red line) has only now converged to the revenues collected from equivalent taxes in the pre-GST regime. In 2023-24, net government GST revenues (both Centre and state, including the cess) amounted to 18 trillion or 6.1 per cent of GDP, about the same as the pre-GST 2012-17 average (blue line).