The cost of GST & fiscal crises in states

MORE than seven years since its introduction, the Goods and Services Tax (GST) regime, hailed as a game-changing innovation at the time of its launch, is still being sustained with hype. From the point of view of performance, the regime, while not yielding the revenue gains its “efficiency” was supposed to deliver, is proving to be the final factor driving most state governments to bankruptcy.

The Central Government has sought to conceal this reality by reporting the nominal values of GST collections every month and comparing them with the previous month or the corresponding month of the previous year.

It is to be expected that so long as the GDP growth is positive, revenues from taxation, especially indirect taxation, are likely to increase in nominal terms. But even this “natural” trend has been broken by multiple monthly figures that point to a lower yield of revenues than in past periods chosen for comparison.

To make up for that bad news, the Centre has tended to make much of those months when nominal or current price figures are higher than in the past, advertising “record” collections in hyped press releases.

A sober and reasoned assessment points to the following: If we exclude the period from the GST’s inception in August 2017 till March 2022, allowing sufficient time for the system to have overcome its “teething troubles”, we have net collections of

Rs 880 billion in April 2022. Between that month and October 2024 — a period of 31 months — there have been only three months when the aggregate figure exceeded that sum. These, too, are ‘nominal’ receipts.

Besides the growth of the economy, another reason why receipts from taxation should rise because of inherent “buoyancy” is the impact of inflation. It takes more money for a government to do the same thing when the prices are higher. The trend rate of monthly growth in receipts from the GST between April 2022 and October 2024 was just 0.86 per cent. Adjust for inflation, and the growth rate of “real” receipts falls to exactly half of that: 0.43 per cent. That is near-stagnation.

This has hit the state governments particularly hard because they are the ones who ceded a substantial share of their taxation rights to the GST Council, which is dominated by the Centre. With the shift to the GST, the share of state taxes that were subsumed under the new tax regime (44 per cent) was much larger than that of the Central taxes (28 per cent).

The loss of that revenue stream occurred during a period in which the Centre had squeezed the volume of its own receipts that it devolved to the states. It did that by relying increasingly on imposts that are not included in the divisible pool of resources to be shared with states based on the recommendations of the Finance Commission.

The most egregious instance of this is the reliance on surcharges and cesses that are not shareable. The share of surcharges and cesses to Gross Tax Revenue of the Centre, which was 9.5 per cent in 2013-14, rose to 14.8 per cent in 2023-24 (it was as high as 20.5 per cent in 2020-21).

The other factor inflicting losses on the states is the large direct tax concessions given to friends in the corporate sector by the Centre, which reduces the size of the divisible pool.

The question does arise as to why the states agreed to cede their taxation rights and reduce their own fiscal autonomy. One reason was their own embrace of the neoliberal ideology. Value-Added Tax (VAT), to which species the GST belongs, is the preferred means of taxation in neoliberal environments that privilege corporate profits (with lower taxes) and mobilise revenue through indirect taxes like VAT, the burden of which falls disproportionately on the poor and middle classes.

This “regressive” character is sought to be papered over by claiming that these taxes are more “efficient”. In India’s case, that argument was fortified by the claim that a system that “harmonised” taxes across states was also efficient. Why states at different levels of development and very different economic structures should have the same structure of taxation across commodities is, of course, not addressed.

Based on such arguments, it was projected that the GST regime would not just be “revenue-neutral”, but also, in fact, deliver substantial increases in revenues. The states bought into this spurious argument. In fact, they were also cajoled into accepting the major shift in regime with the promise that in case revenues accruing to the states from the GST fell short of a level that reflected a 14 per cent annual increase relative to the pre-GST collections from taxes that were subsumed under the regime, they would be compensated by the Centre.

That promise was for five years, by which time the “game-changing” GST was supposed to deliver on its promises.

Those promises have been completely belied. The annual average revenue realised from taxes subsumed under the GST from 2012-13 to 2016-17 is estimated at Rs 7.70 lakh crore. If that is taken as the base from which the 14 per cent growth in revenues from the GST is calculated, the actual collections reflect a significant shortfall relative to the ‘promised’ revenues. Not surprisingly, compensation for the shortfall financed with the compensation cess was crucial for the states.

But that came to an end after five years, much to the surprise of the states. They are now more than ever dependent on the patronage of the Centre for revenues that match the expenditures associated with the developmental responsibilities they constitutionally shoulder.

However, the Centre is not just limiting the transfers it makes to the states but also exercising its right to limit borrowing by the states in a punishing fashion. The result is a fiscal crisis at the state level, which is translating into a crisis of the federal structure itself.

If the Indian Union has to be protected, evidence suggests that the GST “experiment” must be abandoned.