Increased tax collections in Northeast India: GST adoption gave north-eastern states a big developmental push

Source: The post increased tax collections in Northeast India has been created, based on the article “GST adoption gave north-eastern states a big developmental push” published in “Live mints” on 18th April 2024.

UPSC Syllabus Topic: GS Paper 3-Indian economy-mobilisation of resources,

News: The article discusses how the introduction of the Goods and Services Tax (GST) in India in 2017 has significantly helped the northeastern states by increasing their tax revenues. This boost in funds has allowed these states to improve infrastructure and participate more in national economic activities.

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What is the current status of tax collections in Northeast India?

Exceptional GST Revenue Growth: Since the GST was implemented in 2017-18, the northeastern states have experienced a compound annual GST revenue growth rate of 27.5% through to 2022-23, which is significantly higher than the pre-GST tax revenue growth rate of 9%.

Substantial Increase in State Revenues: The northeastern states’ total revenue contribution to the central exchequer now stands at around ₹20,000 crore annually, with ₹8,000 crore from GST and ₹12,000 crore from central excise. This demonstrates a major increase in financial resources due to efficient tax collection and compliance under GST.

Financial transfers from the central government to northeastern states have significantly increased. For example, Arunachal Pradesh received a 1,665% increase in tax devolution from 2014 to 2024. Other states like Mizoram, Manipur, Nagaland, and Sikkim also saw over a 500% rise in devolution, allowing them more budget for development.

What were the reasons for increased tax collections in Northeast India?

Consumption-Based Tax System: GST, levied at the point of consumption rather than production, benefited northeastern states which are primarily consumer states. This shift from the origin-based Central Sales Tax, which they hardly benefited from before, significantly increased their tax collections.

Improved Tax Compliance: The GST system encourages better compliance through a tax-credit mechanism. This self-policing setup minimizes tax evasion, enhancing revenue collection.

Use of Technology: States like Assam employed big-data software to identify tax discrepancies, which significantly improved collection efficiency, resulting in the recovery of about ₹730 crore in tax settlements.

Spillover Effects on Revenue Collection: The implementation of GST has refined the overall mechanism of revenue collection in states, helping to streamline various tax collection processes beyond just GST.

Balancing Fiscal Imbalances: GST has played a crucial role in addressing the vertical fiscal imbalances between the northeastern states and the Central government, contributing to a more equitable financial structure across the country.

Enhanced Participation in National Market: The adoption of GST has enabled northeastern states to more actively engage in the national market, opening up greater opportunities for trade and investment, which in turn boosts economic activity and development in the region.

What role has GST played during economic challenges?

GST and the associated compensation packages helped northeastern states manage economic challenges during the COVID-19 pandemic. This support prevented a collapse in revenue and enabled continued investment in development projects.

Way forward

With the increase in revenue and development funding, northeastern states are encouraged to further develop their infrastructure and explore new economic opportunities. This will help them fully utilize their potential and contribute more significantly to the national economy.

Question for practice:

Examine how the Goods and Services Tax (GST) implementation has impacted tax collections and economic development in Northeast India.