Why GST growth rates of states are showing such high disparity?

By: Anshul Vipat

Why is that despite being under a single indirect tax regime and deriving similar benefits from it, there is such a huge disparity in GST growth rates?

The monthly Goods and Service Tax (GST) revenues have exceeded the mark of Rs. 1.4 lakh crore for the tenth straight month in a row as GST revenues rose by 15 percent in December 2022 to over Rs 1.49 lakh crore, the Finance Ministry said. The GST collection for the month of December increased by 2.5 percent over November’s collections that had marked a three-month low. The gross GST revenue collected during December 2022, which reflect transactions undertaken in November, is Rs 1,49,507 crore, of which Central GST (CGST) is Rs 26,711 crore, State GST (SGST) is Rs 33,357 crore, Integrated GST (IGST) is Rs 78,434 crore (including Rs 40,263 crore collected on import of goods) and Cess is Rs 11,005 crore (including Rs 850 crore collected on import of goods), the Finance Ministry said.

Maharashtra continued to maintain its top position in GST collections increasing its collection to Rs 23,598 crore in December 2022 against Rs 19,592 crore in December 2021, a rise of Rs 4,006 crore. Bihar reported the highest growth in revenues at 36 percent, followed by Nagaland (30 percent), Arunachal Pradesh (27 percent), with Gujarat and Andhra Pradesh seeing GST inflows rise by 26 percent each. Tamil Nadu’s revenues rose 25 percent, followed closely by Rajasthan and West Bengal (24 percent), Madhya Pradesh (22 percent) and Maharashtra (20 percent). 

But inside this data lies a hidden but important story.

IndiaTracker analysis of the GST collection across states in the first six months of FY23 compared with the first half of FY22. For instance, as mentioned above Maharashtra, Karnataka, Gujarat recorded double-digit growth in the GST collection in the first half of this fiscal year while states such as Odisha, Jammu and Kashmir, Jharkhand, Himachal Pradesh and Chhattisgarh have recorded a decline in GST collections.

So why is that despite being under a single indirect tax regime and deriving similar benefits from it, there is such a huge disparity in GST growth rates?

First, GST is a consumption-based tax. So, higher the consumption in any state, higher the GST collection. Growth in consumption in a State would depend upon the sectoral composition of the States’ GSDP, per capita income and the propensity of the residents to consume.

The manufacturing sector witnessed a sharp recovery in FY23 with the services PMI moving above 58 in the first quarter of this fiscal year. States that have higher proportion of manufacturing in the state GSVA (gross state value added) such as Maharashtra, Karnataka and Kerala witnessed higher growth in GST collections in the first half this year.

On the other hand, States with higher proportion of agriculture in the GSVA have seen lesser growth in GST collection. The share of agriculture in GDP reported a decline to Rs 4933.25 billion in the second quarter of 2022 from Rs 5688.80 billion in the first quarter of 2022 and Rs 6626 billion in the fourth quarter of 2021. So states like Madhya Pradesh, Andhra Pradesh and Rajasthan that derive over 30 percent of State GSVA from agriculture witnessed poor GST growth.

Per capita income of the States’ population seems to have played a part in GST collections too. Higher per capita income denotes higher purchasing power and thus indicates higher consumption. As per RBI report, Goa has the highest State net domestic product per capita at Rs 4,35,959. So no one is surprised when Goa reported highest growth in GST collections this year at 20.97 percent. Residents of Karnataka, Haryana and Kerala, which recorded double-digit growth in GST collections, too have high per capita income.

On the other hand, states with very low or negative growth in GST collections such as Jharkhand, Madhya Pradesh, Chhattisgarh and Odisha also have very low per capita GDP. The uneven recovery in the economy, with the lower income group getting more impacted by pandemic led disruption seems to be reflected in the lower GST collection in these States this fiscal year.

The above analysis indicates that state policies have a larger role in increasing their GST collection. Thus their policies must tilt towards making their residents consume more goods and services thus increasing the states' income.