Two years of GST: How the states are doing

The goods and services tax (GST) completed two years recently. It has been the biggest reform of the indirect tax system in India. There were anxieties expressed initially by all the industrialised states like Maharashtra, Tamil Nadu, Gujarat, Karnataka that they would have major shortfalls in their revenue post the implementation of GST. It is now time to look at the data and see which are the states that are losing and which are the states that are facing a shortfall. 

We have data available for 2017-18 and 2018-19. The year 2017-18 is not representative because a large amount of the Rs 1.76 trillion of IGST was lying undistributed at the end of that year. But in 2018-19, most of the IGST was distributed either by way of regular settlement or provisional settlement. So we can take the figures of 2018-19 to see who is gaining and who is trailing. 

First let us understand how the figures for revenue shortfall or revenue surplus were derived for this article. The revenue of 2015-16 of all the states was frozen as the base revenue. On top of that, a yearly increase of 14 per cent was calculated for 2016-17, 2017-18 and 2018-19. This gave us the revenue to be protected in 2018-19 for each state. We deducted from this the SGST earned by the state as well as the IGST settled, both regular and provisional, to arrive at the figure of revenue shortfall or deficit in terms of percentage of revenue to be protected. The average revenue shortfall of all the states put together was 16 per cent in 2017-18, which came down to 12 per cent in 2018-19.

Here are the headlines from this data analysis. The north-eastern states are the biggest gainers. Mizoram was the biggest gainer, getting 62 per cent more revenue compared to protected revenue. Also Arunachal Pradesh gained a surplus of 58 per cent, Manipur 35 per cent, Nagaland 24 per cent and Sikkim 12 per cent. Apart from the north-east, the only two states that gained a surplus in 2018-19 were Andhra Pradesh at 4 per cent and Telangana 1 per cent. The reason for the gain by the north-east states is that their own tax collection mechanism was weak before GST and hence the revenue base was low. They gained also because they get tax for all the goods imported from other states and consumed locally. 

The states that had excessive shortfall in 2018-19 were Puducherry (43 per cent), Punjab (37 per cent), Himachal Pradesh (36 per cent), Uttarakhand (34 per cent), Jammu and Kashmir (27 per cent). These states have some issues with their tax structure that caused this shortfall. 

If we look at some of the big industrialised states, the position is not as bad as was expected. The revenue shortfall of Maharashtra was only 4 per cent, that of Tamil Nadu only 5 per cent, West Bengal was 8 per cent only, Gujarat 14 per cent, Haryana 16 per cent, while Telangana and Andhra Pradesh were in surplus. The only surprise in this list was Delhi and Karnataka that had a shortfall of 22 per cent and 20 per cent respectively. The reason why most industrialised states had a minor shortfall is that their consumption base is large, and they also have a share in the service tax income.

Let us look at the position of some of the big consuming states. Uttar Pradesh has a shortfall of only 6 per cent, Rajasthan 8 per cent, Madhya Pradesh 14 per cent, Jharkhand 14 per cent, Bihar 18 per cent, Odisha 24 per cent, and Chhattisgarh 25 per cent. The expectation that the consumption states would gain post GST has come largely true, except in the case of Orissa and Jharkhand.

There are some common trends observed among states with a large shortfall. These include natural and structural factors such as geographical location, size of the economy, smaller and skewed taxable base and low domestic consumption. For most of these states, the contribution of CST or purchase tax or cesses was very high in the subsumed taxes. The share of CST in subsumed taxes was as high as 29.5 per cent in Uttarakhand, 27 per cent in Puducherry, 14 per cent in Himachal Pradesh as against the national average of 8 per cent. These were therefore the highest shortfall states. 

One of the main reasons for the decline in revenue in Punjab was the loss of revenue from agriculture produce. During 2015-16, Punjab got Rs 2,000 crore from purchase tax and Rs 1,041.75 crore from infrastructure development fee (ID fee) on the procurement of food grains, which was lost post-GST. The revenue under these two heads constitutes about 21 per cent of the protected revenue. Uttarakhand and Himachal Pradesh had industries set up because of central excise exemption, from which the state got huge CST income, which stopped with GST. Also, with no tax exemption, some of the units may have shifted their production base, thus impacting their revenue further.

One more reason was that the overall growth rate of taxes subsumed during the four-year period prior to the implementation of GST was much lower as compared to the growth rate of 14 per cent which was promised. It was 5.88 per cent in Puducherry, 5.45 per cent in Punjab, 11 per cent in Himachal Pradesh. This indicates the potential to grow revenue was missing prior to GST. And hence the revenue gap is bound to remain if the 14 per cent growth rate is taken for granted. Unless these states buck up their revenue efforts, this gap of 5-10 per cent will remain after the compensation period is over. 

Bihar’s revenue shortfall is mainly because of the fact that its revenues had grown at the rate of more than 17 per cent in the four years preceding GST which became the base. The revenue pre-GST was high because it had increased VAT on many items to counteract loss of alcohol revenue after prohibition. Also it got a windfall of entry tax after the judgement of the Supreme Court. Odisha and Chhattisgarh might have lost CST revenue on minerals exported to other states.

Of course, the entire shortfall of all the states is being met out of the revenue of approximately Rs 1 trillion being collected as compensation cess, which will continue till June 2022. Once the economy picks up, we can expect shortfalls to reduce. A major increase in revenue will come when the new system of filing of tax returns is brought in, in which there will be no possibility of false input tax claims. Even after 2022, the taxes collected as compensation cess will be an additional source of revenue for both the Centre and the states. So we can expect that revenue shortfall will be significantly reduced by then. Some states with large shortfalls will have to put in extra efforts for revenue mobilisation. 

The writer is former Union finance and revenue secretary