Five years of GST regime: How have the states fared?



The introduction of the Goods and Services Tax (GST) at midnight on June 30, 2017, marked the end of nearly a decade-long negotiation between the states and the Centre. Evolving a consensus on such a contentious issue of vital importance to the fiscal regime, particularly of the states, was unsurprisingly a long-drawn process. It may be recalled that value-added tax (VAT) on goods used to be the most buoyant source of revenue for states earlier, contributing as much as 50%-60% of their own tax revenues. They had the autonomy to vary the VAT rates on different goods, as and when needed, for their revenue requirements.

Under the GST regime, they were required to voluntarily surrender this autonomy. Quite understandably, states were concerned about their revenue losses under the proposed new tax regime. Accordingly, a “revenue under protection” (RUP) was put in place and states were given an assurance, incorporated in the legislation, that GST revenue in a year (over the initial five years) shall not be less than their assured RUP, ie what they would have raised from taxes subsumed under GST assuming an annual growth rate of 14%. A special GST cess was also agreed upon.

With GST completing five years last week and the RUP period over (at least in the current form), it is worthwhile to assess how the states fared during this transition period. For this purpose, we analysed the GST revenue of 21 large states between 2017-18 and 2020-21 vis-à-vis their RUP for these years (data for FY 2022 was not yet available). With the exception of Andhra Pradesh and Telangana in 2018-19, all these states suffered revenue losses (ie actual GST revenue fell short of RUP) each year. The average revenue loss for different states over the four-year period ranged between 10% (Telangana) and 44.3% (Punjab). The average (median) loss for all the states taken together is around 25%. Revenue losses of Punjab, Himachal Pradesh, Uttarakhand, Goa, and Chhattisgarh exceeded 30% for the whole period (Odisha’s loss was 29.6%).

An analysis of the data suggests that revenue loss was higher for states with a higher share of manufacturing and mining in their Gross State Domestic Product (GSDP). For states, the introduction of GST shifted the tax base from production to consumption.

Table 1: GST Revenue Shortfall (%) – Mining 
Table 2: GST Revenue Shortfall (%) – Manufacturing
Source: a) Directorate of Economics and Statistics of respective state governments; b) NSSO, MOSPI, Government of India; c) RBI: Handbook of Statistics on Indian States. 
Source: a) Directorate of Economics and Statistics of respective state governments; b) NSSO, MOSPI, Government of India; c) RBI: Handbook of Statistics on Indian States. 

Further, unlike VAT, which was an origin-based tax, GST was a destination-based tax. For example, earlier, if steel produced in Odisha was purchased and used by an industry in Punjab, the producer state of origin used to get some revenue through the levy of Central Sales Tax (CST). Under the GST regime, however, the full tax on the transaction accrued to the destination state (i.e. Punjab). No tax revenue accrued to Odisha in this case.

By design, therefore, states with a larger share of manufacturing and mining were likely to suffer relatively higher revenue losses. This possibly explains why Goa, Himachal Pradesh, and Uttarakhand – with a high share of manufacturing in their GSDP – suffered the steepest losses in revenue. Relatively higher losses in Odisha and Chhattisgarh were also similarly explained, by the high share of mining in their GSDP. For Punjab, the loss of revenue from the purchase tax on paddy and wheat, which was subsumed in GST, was a possible explanation.


When GST was launched in 2017, it was assumed that its implementation would stabilise over five years. However, the Covid-19-induced global recession derailed the planned stabilisation of GST by at least a couple of years.

Against this backdrop, what is the way forward? Should the states be left to fend for themselves from this point on? That would perhaps be unfair to the states, as they have not got the requisite transition period to stabilise the implementation of GST. On other hand, the Centre’s exchequer too has suffered massively on account of the pandemic. As such, it might not be pragmatic to extend the existing compensation mechanism, which many experts anyway describe as too generous.

A solution will need to tread the middle path, balancing the concerns of both the states and the Centre. One possible suggestion on the table is M Govinda Rao’s proposal to revise the scheme and link the rate of growth for calculating RUP to the state’s growth rate of GSDP. This ensures a floor level of GST revenue for the states and also possibly mitigates the problem of “moral hazard” which is inherent in such a revenue guarantee scheme. It is quite likely that states may have some better solutions in this regard. What is critical at this juncture is to work out a consensual formula well before the tenure of the existing compensation scheme expires.

Asit Mohanty is a Professor of Finance at the XIM University, Bhubaneswar and Jugal Mohapatra is a former Chief Secretary of Government of Odisha

The views expressed are personal

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