Has GST reduced inter-state disparities?

Source– The post is based on the article “Has GST reduced inter-state disparities?” published in the mint on 1st December 2022.

Syllabus: GS2- Indian economy and mobilisation of resources

Relevance– Taxation structure of country

News– The article explains the performance of GST regime.

Two months, April and October in 2022 have seen the highest GST collection since its introduction in July 2017.

With introduction of GST, there was fear among states that it will lead to lesser revenues. The central government guaranteed a 14% growth in state revenue. It promised to make up for any shortfalls.

This compensation was only for five years till July 2017. It has ended this year.

What was the logic behind GST?

Convergence among states– No state can offer tax breaks or tax incentives to lure investments. It will ensure a level playing field among states.

It will replace local and state taxes. There will be a national standard tax on commodities. The result will be a national market for any good. It would be easier for companies to pick up underdeveloped areas for investment.

Reducing cost– A national tax would reduce compliance and administrative cost. Better enforcement and compliance means higher tax revenues.

Has it led to redistributing investments?

After the introduction of GST, Over half of proposed industrial investments are still accounted for by three states- Gujarat, Maharashtra and Karnataka.

Convergence of income has not happened.

Has it led to higher revenues?

A working paper by National Institute of Public Finance and Policy shows the shift in tax revenues pre and post GST.

The data shows that there is uniform decline across most states, rich or poor in tax to GDP ratio. The exceptions are states like Haryana, Rajasthan and Maharashtra.

Central government has found other ways like taxes on Petroleum to cope up with the shortfall in revenues.

What is the way out for states?

There is a need for enforcing better tax compliance. States need to crack down on tax evasion, Investment in technology for faster payment of dues and making the entire GST system easier.

States can expand revenues in the longer term by doing two things. They need to reduce transaction costs and other costs of doing business. They need to expand consumption in their states by expanding economic opportunities.

But expanding consumption runs against one of the adverse consequences of the GST regime. It presumes that per capita income and employment are increasing. But worst affected by GST has been the MSME sector. RBI data shows the impact of demonetisation on MSMEs.