Seven years on, GST still sparks Centre-state friction
₹2.1 trillion, the highest ever for a month. GST revenues stood at 6.62% of the gross domestic product (GDP) for the fourth quarter of 2023-24, much higher than the corresponding quarters for the preceding two financial years (Chart 1). But a deconstruction of GST numbers over seven years, especially from the perspective of states, reveals expectations belied and friction points aplenty.
The numbers above cover both so-called ‘central’ and ‘state’ GST collections, which are both imposed on goods in equal proportion (usually, at 9% each). States are entitled to all state GST revenues earned from goods bought and sold within a state. If a good is sold across state borders, the GST revenue (called integrated GST) is shared equally between the Centre and the state where the consumer is located.
Further, the revenue earned by the Centre by way of central GST, and its share of IGST, is shared with states in the same way as corporation or income tax is—as recommended by the Finance Commission. Currently, that means that around 41% of central GST revenues are shared with states under a predetermined formula. The GST system made fundamental changes to the financial independence of states.
Until the introduction of GST, states and even municipalities had the power to impose a range of taxes on goods entering or leaving their jurisdiction. For instance, octroi imposed on goods entering Mumbai was a major source of revenue for the country’s richest municipality, the Brihanmumbai Municipal Corporation (BMC). When GST was introduced and octroi killed, the BMC had to be compensated to the tune of thousands of crores every year for octroi.
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