Tax hierarchy sees reshuffle as Odisha, Telangana take unexpected leads

Smaller states such as Odisha and Telangana are emerging as the fastest-growing contributors to GST and direct taxes, challenging the long-held dominance of India's traditional economic powerhouses

A shift appears to be underway in India’s tax landscape, with smaller states such as Odisha and Telangana emerging as the fastest-growing contributors to indirect and direct tax collections, respectively, challenging the long-standing dominance of traditional economic powerhouses such as Maharashtra, Karnataka, Gujarat and Tamil Nadu.

 

An analysis of 28 states and the national capital region (NCR) of Delhi revealed that among the states whose direct or goods and services tax (GST) collections crossed the Rs 5,000 crore mark, Odisha leads in GST collection growth with a compound annual growth rate (CAGR) of 22.4 per cent between FY18 and FY25, while Telangana tops direct tax collections with a CAGR of 50.7 per cent between FY19 and FY24.

 

With 22.4 per cent GST collection growth, Odisha was one of the few states to have outpaced the 14 per cent compensation-cess growth benchmark built into GST at its inception. Bihar followed closely with collections increasing 20.3 per cent, while Maharashtra, despite being the largest contributor in absolute terms, registered a growth of 19.2 per cent.

 

When it comes to total collections of GST, there was a churn in the top five GST collecting states in FY25, with Haryana displacing Uttar Pradesh for the fifth position while Maharashtra, Karnataka, Gujarat, Tamil Nadu topped the chart. Odisha’s GST collections jumped from Rs 14,849 crore in FY18 to Rs 60,928 crore in FY25, moving it up two spots - from 12th in FY18 to 10th in FY25.  

 

As for growth in direct taxes, Telangana led the pack with 50.7 per cent CAGR, followed by Chhattisgarh (20.8 per cent) and Haryana (18.9 per cent).

 

When it comes to total collections of direct taxes, the hierarchy of states saw a reshuffle as well. While in FY19, Maharashtra, Delhi, Karnataka, Tamil Nadu, and Gujarat led the pack, by FY24 Karnataka climbed to the second position, overtaking Delhi, which slipped to third position. Telangana’s direct tax collections jumped from Rs 10,860 crore in FY19 to Rs 84,439 crore in financial year FY24, catapulting it from the 15th position to the sixth rank nationally, while larger states like Andhra Pradesh saw a reversal, going from sixth place to 11th in the same period.

 

According to Madhavi Arora, chief economist at Emkay Global Financial Services, the exceptional performance of these smaller states stems from a combination of structural factors and policy reforms.

 

"Specific to Telangana, it has had quite a few tailwinds — Hyderabad has emerged as one of the largest Global Capability Centre (GCC) hubs after Bangalore, and is also a key IT hub, both of which have led to high direct tax collections," Arora explained.

 

Arora also sees Hyderabad boosting direct tax collections through its R&D, tech, and pharmaceutical companies, as well as through growth in related sectors like commercial real estate.

 

"It (Telangana) has also formalised rapidly as an economy, which automatically has led to low tax evasion, while growth rates would have benefited from a favourable base effect — the state was only formed in 2014," she added.

 

For Odisha, the story centers on its mineral wealth. Revenue from Odisha's mining sector witnessed a ten-fold increase, growing from Rs 4,900 crore in 2016-17 to approximately Rs 50,000 crore in 2021-22. The state government's e-auction policy for mineral blocks resulted in premium payments of up to 150 per cent over and above the standard 15 per cent royalty.

 

"Mining revenue constitutes about 90 per cent of Own Non-Tax Revenue, 45 per cent of the state's total Own Revenue, and 26 per cent of total revenue receipts come from the mining sector," according to the state government data.

 

Echoing similar views, Arora says that the increasing formalisation of the economy combined with strong mining operations have contributed to the GST collection growth. She also states heavy infrastructure investments (Odisha’s capex/GDP is the highest for all major states since FY21) and faster growth in consumption as other factors.  

 

Analysis shows that rapid growth in tax collections has enabled Odisha to improve its fiscal position substantially. The state maintained a revenue surplus of 3 per cent of GSDP in 2024-25. The fiscal deficit of the state decreased from 2.13 per cent of the GSDP FY18 to 1.8 per cent in FY24.

 

According to Arora, the higher growth rates of these so-called ‘smaller states’ are partly attributable to a favorable base effect. "The likes of Maharashtra, Gujarat, and Tamil Nadu already have sizable formalised economies, and thus growth rates will be slower on such large bases," she said.

 

However, she adds that both are among the states with the highest capex/GDP over the last years. “This has helped boost economic growth and productivity, while also improving ease of business and tax compliance.” she notes.