GST and states, a reality check of how indirect tax system is working

Early fears about the regime have not come true, but there is room for improvement

Taiwan in 1951 came up with an ingenious plan to improve tax compliance: citizens taking receipts for purchases could use them as lottery tickets. Customers were incentivized, and businesses found it hard to evade taxes. The plan’s success prompted other countries, Slovakia and Greece among them, to launch similar initiatives.

India doesn’t seem to find the need yet for such schemes amid surging goods and services tax (GST) collections. Overall collections touched a record high of Rs 1.87 trillion in April 2023, though there are some differences among individual states.

The fears large manufacturing states expressed when the GST regime became operational in the financial year 2017-18 (FY18) have not materialised. The regime looked to tax at the point of consumption rather than the place of production. States which are India’s manufacturing hubs expected a loss of revenue. They have not lost by accepting GST.

The top five states in GST collections include large manufacturers, shows an analysis of state data. Maharashtra, Karnataka, Gujarat, Tamil Nadu and Uttar Pradesh are the top five states across the years in which GST has been operational. Their share in overall collections on the domestic supply of goods and services has increased with time as many large manufacturing states are also large consumers as seen in chart 1.

Mining states feared that revenue growth would slow down due to GST. This analysis looked at data from FY19-23. Comparable FY23 state data was available till February. Growth in GST collections was higher than average in Odisha, which has a large mining sector, but lower than average in other mining states like Chhattisgarh and Jharkhand. Northeast states which have limited manufacturing and high-consumption states like Kerala did well in GST collection (chart 2).

One reason for the difference in collections could possibly be state governments' efficiency in collecting taxes. GST collected by the union government has grown faster than state GST in all 47 months for which year-on-year data can be calculated. GST came into effect in July 2017, so the first year-on-year figure is for July 2018. State collections have grown slower, particularly during the pande

mic (chart 3).

Growth in GST collections was assisted in part by high inflation. Lower inflation may affect future growth. States’ ability to improve tax collection may help numbers: whether through Taiwan-like innovations or otherwise.