Introduction

Introduced in 2017, the Goods and Services Tax (GST) replaced multiple indirect taxes at both Central and State levels, including excise duty, service tax, and VAT, creating a unified national tax framework. The recent data released by the Central Government for October 2025 indicates a 4.6% year-on-year increase in total revenue collection to ₹1,95,936 crore. However, the state-wise analysis has revealed an emerging concern: while some states have achieved strong revenue growth, others are struggling to reach even pre-GST revenue-to-GDP ratios.

Why in the News

The latest data on GST revenue collection highlights contrasting fiscal trajectories across Indian states. Despite record-high GST collections nationally, several states’ tax-to-GDP ratios remain lower than before 2017, indicating a possible erosion of state fiscal autonomy. The issue has gained attention because:

1. Sixteen states and Union Territories now earn a smaller share of revenue from GST than pre-GST taxes.
2. The aggregate revenue from subsumed taxes has declined from 6.1% of GDP in 2015-16 to 5.5% in 2023-24.
3. The average GST-to-GDP ratio over the past seven years is 2.6%, below the pre-GST average of 2.8%.
4. This reversal is significant as it questions the efficacy of India’s largest tax reform and the viability of fiscal federalism under GST.

How did GST Change the Tax Landscape?

1. Unified Tax Framework: GST subsumed indirect taxes such as excise duty, VAT, and service tax under a single national structure, simplifying compliance.
2. Revenue Flow Shift: Revenue previously collected by states under independent taxes now flows through a shared GST mechanism, altering fiscal control.
3. Increased Central Dependence: States became dependent on GST compensation cess and Centre’s transfers for revenue stability, altering fiscal autonomy.
4. Short-term Gains: Initially, GST led to better compliance and formalization, resulting in short-term revenue surges.

How Are States Performing After GST?

1. Diverse Outcomes: According to PRS Legislative Research, state-level GST revenues continue to trail the pre-GST levels as a share of GSDP.
2. Declining Tax-to-GDP Ratio: Aggregate revenue from subsumed taxes fell from 6.1% (2015-16) to 5.5% (2023-24).
3. Below-Average GST Performance: The seven-year average GST-to-GDP ratio (2.6%) is lower than the pre-GST average (2.8%).
4. Top Performers: Maharashtra, Karnataka, Gujarat, Tamil Nadu, and Haryana have shown robust post-GST growth in tax collection.
5. Lagging States: J&K, Punjab, Chhattisgarh, Madhya Pradesh, and Odisha recorded revenue decline from subsumed taxes as a percentage of GSDP.

Which States Have Been Worst Affected?

1. Northeastern States: Mizoram, Nagaland, Sikkim, Meghalaya, and Manipur saw an improvement in tax-to-GSDP ratios.
2. Northern and Central States: Jammu & Kashmir, Punjab, Madhya Pradesh, Chhattisgarh, and Odisha saw a decline in subsumed tax revenues.
3. Urban-Rural Divide: Industrial and service-oriented states benefited, while agrarian and resource-dependent states witnessed fiscal compression.
4. GST Compensation End: After 2022, when the GST compensation guarantee ended, fiscal stress intensified for states heavily reliant on the compensation mechanism.

What Does the Data Reveal About Fiscal Federalism?

1. Centre-State Revenue Imbalance: 20 out of 36 states/UTs now collect less than 40% of their revenue from GST, deepening fiscal asymmetry.
2. Medium-term Fiscal Impact: The 15th Finance Commission projected a GST-to-GDP ratio of 7%, but current data reflects underperformance.
3. Long-term Fiscal Risks: Declining state revenue autonomy may affect social spending and capital expenditure, widening regional disparities.
4. Compliance Inefficiency: Multiple tax slabs, refund delays, and compliance burdens continue to affect smaller states’ GST efficiency.

Conclusion

The GST has achieved its unification objective but has not yet ensured revenue equity across states. While high-compliance, industrial states have benefited, smaller and agrarian states remain fiscally strained. The data underscores the need for recalibrating the GST architecture, simplifying slabs, improving IT infrastructure, and enhancing fiscal transfers, to align with the spirit of cooperative federalism and fiscal balance.

PYQ Relevance

[UPSC 2019] Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017.

Linkage: It evaluates the impact of GST on Centre-State revenue balance and indirect tax structure post-2017.

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