GST spurts fiscal equality: tax-GSDP ratio higher in poorer states

One reason for their gain is the Centre has transferred them much higher amounts than to bigger states

Goods and Services Tax (GST) collections topped Rs 1.5 trillion for the third month in a row in May 2023. It was the 15th consecutive month of more than Rs 1.4 trillion GST revenue.

One aspiration for the GST system was that it would lead to regional development as it is a destination-based tax regime. In the mid 1990s, an acronym BIMARU, coined by Ashish Bose, described low development in Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. Madhya Pradesh and Rajasthan may no longer be in this category now and smaller new states were carved out of Bihar, Uttar Pradesh and Madhya Pradesh later.

As such, let us take four states—Uttar Pradesh, Bihar, Meghalaya and Manipur—where per capita income was less than Rs one lakh a year in 2020-21 to assess how GST revenues have risen there and compare it with large producing and consuming states, such as Maharashtra, Gujarat and Karnataka. Most poor states are consuming ones except for Uttar Pradesh to an extent.

States that gained

In Uttar Pradesh, GST (including transfer of central GST and integrated GST) at Rs 52,405.3 crore in 2017-18 (the figures for the entire year were taken on a pro-rata basis on the basis of nine months of GST receipts) constituted 3.6 per cent of GSDP. It rose to Rs 82, 558.6 crore the next year, accounting for 5.2 per cent of GSDP. When the economy slowed down in 2019-20 even prior to lockdowns for Covid-19, GST collections fell Rs 80,665 crore, representing 4.7 per cent of GSDP. In the Covid year of 2020-21, receipts from the new indirect tax system further fell to Rs 74,471.3 crore, accounting for 4.5 per cent of GSDP. When the economy partially recovered in 2021-22 despite the second wave of Covid-19 and regional lockdowns, GST revenues rose to Rs 1.005 trillion, constituting 5.2 per cent of Uttar Pradesh’s GSDP.

Receipts from GST are estimated to have stood at Rs 1.31 trillion (RE) in 2022-23, accounting for 6.4 per cent of GST. For the current financial year, GST is projected to increase to Rs 1.67 trillion or 6.9 per cent of GDP (BE).

Uttar Pradesh is thus projected to see GST collections of almost seven per cent of its GSDP in the current financial year, compared to just 3.6 per cent in the first year of the introduction of the new indirect tax system: 2017-18. One can argue that the figures for 2017-18 were underestimated through a pro rata calculation since GST generally delivers the highest figure in April for a financial year due to arrears and late submission of taxes in March which are reflected in April. If one sees 2018-19 as the normal year for GST collections, even then these collections are projected to rise from 5.2 per cent of GSDP.

One can still argue that figures for 2022-23 and 2023-24 are projections and not actual figures and hence it would not give a correct picture. The last actual figures are available till 2021-22. The share of GST to GSDP would remain constant at 5.2 per cent in 2021-22 compared to 2018-19. In between the share declined due to the slow down of the economy in 2019-20 and Covid-induced national lockdown year of 2020-21.

It should be noted that compensation cess is not included in this assessment.

Now coming to Bihar, it was projected to see GST collections rise to 7.5 per cent of GSDP in 2022-23 (RE) and 2023-24 (BE) each from just 2.2 per cent in 2017-18 and 6.3 per cent in 2018-19. Even if one takes the year 2021-22 for comparison, the share had gone up to 6.6 per cent compared to figures in 2017-18 and 2019-20.

Similarly, Manipur was projected to witness a GST share of 12.1 per cent of GSDP in 2022-23 (RE). Though it would come down to 10.5 per cent in 2023-24 (BE), it would still be quite higher than four per cent in 2017-18 and 7.1 per cent in 2018-19. The share was 8.7 per cent in 2021-22, still quite higher than the figures in 2017-18 and 2018-19.

Meghalaya was projected to witness a GST share at 8.5 per cent of GSDP in 2022-23 (RE) and 9.3 per cent in 2023-24 (BE), compared to just two per cent in 2017-18 and 6.2 per cent in 2018-19. It should be noted that the share of GST in GSDP did not go down much in the state and stood at 6.1 per cent in 2019-20 and in fact rose to 6.3 per cent in the Covid-19 year of 2020-21. When the economy recovered, the share went up to 8.6 per cent in 2021-22, quite higher than the figures in 2017-18 and 2018-19.

Bigger producing states

In comparison, the bigger producing and consuming states—Maharashtra, Gujarat and Karnataka – saw their GST revenues remaining low in proportion to GST. In Gujarat the share was projected to remain 3.3 per cent in 2022-23 (RE) and 3.02 per cent in 2023-24 (BE) compared to 2.4 per cent in 2017-18 and 2.7 per cent in 2018-19. The ratio of GST to GSDP too stood at 2.7 per cent in 2021-22.

Similar was the case in Maharashtra and Karnataka (see chart).

V S Krishnan, a former member of the Central Board of Indirect tax and Customs (CBIC), said, "I had said earlier that fiscal equity among states will improve with GST and it has happened."

Another reason for the GST-GDP ratio rising in poorer states is that the Centre has transferred much higher amounts (in proportion to the states total GST collections) than to bigger states in line with the formula of the 14th and 15th finance commissions.

For instance, UP saw CGST transfer to the tune of Rs 45,918.8 crore and Bihar Rs 25,442 crore in 2021-22 (the latest year for which actual data is available). These sums are much higher than Maharashtra receiving Rs 16,016.7 crore, Karnataka Rs 9158.4 crore and Gujarat Rs 8,815.2 crore that year.

Meghalaya and Manipur saw little amount of transfer at Rs 1,945.5 crore and Rs 1,821.1 crore but it was higher than Rs 1,316 crore collected through SGST in case of Meghalaya and Rs 1,125.5 collected in case of Manipur.

On the other hand, compared to CGST transfer figures as cited above, Maharashtra collected Rs 97,304.9 crore as SGST collections, Karnataka Rs 49,929 crore and Gujarat Rs 43,487 crore as SGST in 2021-22.

As far as GST buoyancy is concerned it varied widely within states over its six years of existence. Such buoyancy is a measure of change in tax revenues in response to economic growth. If it is one, both the tax growth rate and GSDP growth rate (at current prices) are the same. If it is less than one, the tax growth rate is less than the GSDP growth rate and if it is more than one, tax growth rate is more than the GSDP growth rate.

The three richer states saw negative GST buoyancy in 2019-20, when a Covid-induced national lockdown was announced. Karnataka and Gujarat witnessed negative GST buoyancy even in 2020-21 when the major portion of lockdowns fell. In case of Maharashtra, this buoyancy cannot be calculated because of both GST collections and GDP contracted year-on-year.

After that, all the richer states had tax buoyancy of greater than one except for Gujarat for 2023-24 (BE).

Among the four poorer states, only Uttar Pradesh had tax buoyancy in 2019-20. The other three had positive tax buoyancy but less than one. Bihar and Manipur had positive tax buoyancy even in Covid-struck 2021-22, but the former had it at less than one and the latter more than one. In the case of the other two, it cannot be calculated.

When the economy recovered from 2021-22 onwards, only Uttar Pradesh had more than one GST buoyancy and was projected to have it even in 2023-24 (BE). Bihar and Manipur will have less than one in 2023-24 (BE), while Meghalaya witnessed less GST growth than GSDP expansion in 2022-23 (RE).