The release of October 2025 GST collection data shows an overall 4.6 percent year-on-year growth to Rs 1.96 lakh crore, driven by festive spending, but highlights concerns as 20 states and Union Territories experienced revenue declines, underscoring persistent gaps where post-GST revenues lag behind pre-GST levels for most states, as revealed in recent analyses of state finances.
What is GST and How Was It Implemented in India?
Background of Indirect Taxes: Before GST, India had a multi-layered tax system with central taxes like excise duty and service tax, and state taxes like VAT and entry tax, leading to cascading effects where taxes were levied on taxes, increasing costs for consumers and businesses.
Introduction of GST: Launched on July 1, 2017, GST is a unified indirect tax replacing multiple taxes, divided into CGST for the Centre, SGST for states, and IGST for interstate trade, aiming to create a seamless national market and boost economic efficiency.
Objectives and Structure: It operates on a destination-based principle where tax revenue goes to the consuming state, with rates slabs from 0 percent to 28 percent, designed to simplify compliance, reduce tax evasion, and enhance revenue buoyancy through wider coverage.
How Have GST Collections Performed Overall Since Implementation?
Total Collections Trend: From 2017-18 to 2023-24, gross GST collections grew from Rs 13.2 lakh crore to Rs 20.2 lakh crore, but as a share of GDP, they declined from 6.5 percent pre-GST to 5.5 percent post, missing the 7 percent target set by the 15th Finance Commission.
Monthly and Yearly Growth: October 2025 saw Rs 1.96 lakh crore collected, a 4.6 percent rise year-on-year, but this masks underlying issues like flat domestic growth at 2 percent amid rate cuts and festive demand.
Compensation Mechanism: States received GST compensation until June 2022 to cover revenue shortfalls, totaling Rs 2.7 lakh crore, highlighting initial challenges in achieving projected revenues.
What Does the State-Wise Data Reveal About Pre and Post-GST Revenues?
Average SGST as Percentage of GDP: Over seven years of GST, the average stands at 2.6 percent, below the 2.8 percent from subsumed taxes in 2015-16 to 2018-19, affecting fiscal health in most states.
States with Revenue Gains: Five states saw rises, including Mizoram with revenue from subsumed taxes at 3.5 percent of GSDP pre-GST increasing to 4.5 percent post, Nagaland from 2.5 percent to 3.5 percent, Sikkim from 2 percent to 3 percent, Meghalaya from 1.5 percent to 2.5 percent, and Manipur from 1 percent to 2 percent.
States with Revenue Losses: Sixteen states experienced declines, such as Jammu and Kashmir from 4.5 percent to 3 percent, Punjab from 3.5 percent to 2 percent, Chhattisgarh from 3 percent to 1.5 percent, Karnataka from 2.5 percent to 1 percent, Madhya Pradesh from 2 percent to 0.5 percent, and Odisha from 1.5 percent to 0 percent.
Why Are Some States Gaining While Others Are Losing Under GST?
Factors Influencing Gains: Northeastern states benefit from higher consumption patterns and better compliance, with industrial growth in states like Mizoram and Nagaland leading to improved revenue shares relative to GSDP.
Reasons for Losses: Larger states like Punjab and Karnataka face challenges from input tax credits reducing net collections, shifts in consumption patterns, and initial compliance issues, resulting in lower revenues compared to pre-GST excise and VAT systems.
Economic Structure Impact: Service-oriented states may see gains from wider tax bases, while agriculture-heavy states like Madhya Pradesh suffer due to exemptions on farm produce, affecting overall fiscal buoyancy.
What Are the Broader Economic Implications of These Trends?
Impact on State Finances: Lower GST revenues strain state budgets, with own-tax revenue as a share of total revenue expenditure dropping from 55 percent in 2015-16 to 50 percent in 2023-24, increasing dependence on central transfers.
GDP Growth and Fiscal Stimulus: The gap contributes to slower revenue growth than GDP, limiting states' ability to fund development, though reforms like rate rationalization could provide a 0.6-0.7 percent GDP stimulus.
Policy Challenges: Persistent shortfalls highlight needs for better data sharing, compliance enforcement, and compensation extensions to ensure equitable federal fiscal relations.
What Reforms Have Been Suggested to Improve GST Performance?
Rate Rationalization: Recent GST Council decisions aim to simplify slabs and reduce rates on essentials, potentially boosting consumption while addressing revenue gaps through anti-evasion measures.
Compliance and Technology: Initiatives like e-invoicing and data analytics have improved collections, with suggestions for real-time tracking to curb fraud and enhance state revenues.
Federal Cooperation: Strengthening the GST Council for consensus on compensation and revenue sharing is key to balancing Centre-state interests and achieving the original goal of a seamless tax system.
© 2025 Gaining Sun. All rights reserved.