Centre Sacrifices GST Revenue for States' Compensation, Says Former CEA

The Centre has forfeited a substantial portion of revenue from Goods and Services Tax (GST), amounting to up to 1 per cent of GDP annually since the new indirect tax regime was introduced. This was done to fund a 14 per cent compensation guarantee provided to states, according to former Chief Economic Advisor Arvind Subramanian. Subramanian, who played a key role in implementing GST, also mentioned that it is not advisable to include petrol and alcohol under GST at this time.

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Subramanian highlighted that GST, which was launched on July 1, 2017, merged 17 taxes and 13 cesses into a five-tier structure, simplifying the tax system. Speaking at an event organised by the Centre for Social and Economic Progress (CSEP), he described GST as a notable example of cooperative federalism. He contrasted this with the narrative of fiscal centralisation by the Centre over the past decade.

Impact on State Revenues

GST has significantly impacted state revenues. States receive 100 per cent of the State Goods and Services Tax (SGST) collected within their borders and approximately 50 per cent of the Integrated Goods and Services Tax (IGST) from inter-state trade. Additionally, 42 per cent of the Central Goods and Services Tax (CGST) is allocated to states based on recommendations from the Finance Commission.

Subramanian, now a senior fellow at Peterson Institute for International Economics, noted that GST has broadly met expectations in benefiting poorer states. He pointed out that the Centre has lost between 0.5-1 per cent of GDP in revenue each year over the past seven years. He suggested that rationalising cess rates could eliminate the need for future compensation.

Revenue Collection Trends

Despite rate reductions, GST revenues have returned to pre-GST levels, indicating improved collections and a more progressive indirect taxation system. Subramanian acknowledged this improvement but stressed that reforms in the GST structure are essential yet unlikely to occur soon. "What you could have done at the founding moment...GST rates could have been simplified at the founding moment," he remarked.

On the topic of including alcohol and petroleum under GST, Subramanian stated, "I do not think it is politically advisable now to press states to give up more fiscal sovereignty." The GST compensation cess was discontinued after fiscal year 2021-22.

Future Prospects

The gross GST collection saw an 8 per cent increase, reaching Rs 1.74 lakh crore in June. This growth underscores GST's significant contribution to state revenues. However, Subramanian emphasised that while reforms are necessary, they are improbable in the near future due to political and fiscal complexities.

GST remains a critical component of India's tax framework, reflecting both its challenges and successes since its inception. The ongoing debate about its structure and scope continues to shape its evolution.

The article concludes by reiterating Subramanian's insights on GST's impact on state revenues and the broader economic landscape. His observations highlight both achievements and areas needing attention within India's tax system.