₹1.95 Lakh Crore GST Collections in October: An Uneven Story
The ₹1.95 lakh crore GST collected in October 2025—up 4.6% year-on-year—is being hailed as evidence of an economic rebound, buoyed by Diwali consumption. Yet beneath this headline number lies a more fragmented reality. Uneven state performances, revenue shortfalls in key regions, and persistent structural dilemmas cast shadows over the fiscal optimism. The real question is not just how much revenue GST is generating but how equitably it is distributed—and how sustainable this system really is.
A closer look at the state-wise data reveals glaring disparities. Industrial hubs like Maharashtra, Karnataka, and Gujarat still account for a disproportionate 40% of total GST revenues. While five northeastern states—Mizoram, Nagaland, Sikkim, Meghalaya, and Manipur—have achieved modest improvements in their tax-to-GSDP ratios, states like Punjab and Chhattisgarh have seen steep declines. If GST was designed as a destination-based tax to foster equity among states, why then does its architecture still exacerbate fiscal imbalances across regions?
The Framework: GST's Backbone and Weak Links
Introduced in 2017, the Goods and Services Tax consolidated a labyrinth of state-specific taxes and central levies into a unified structure under the 101st Constitutional Amendment Act. Key institutional layers include the GST Council, which makes policy decisions, and state and central tax departments that oversee compliance. The tax operates on a destination principle, meaning revenue accrues to the state where goods or services are consumed, not produced.
The GST revenue mechanism is split into Central GST (CGST), State GST (SGST), and Integrated GST (IGST). For a brief initial period, compensation provided by the Centre under the GST (Compensation to States) Act, 2017 cushioned states from revenue losses. However, the cessation of this compensation mechanism in 2022 has reopened debates on fiscal autonomy, exposing states to heightened revenue risks.
Compounding the challenge is India’s complex rate structure. Despite some rationalisation, the existing four-rate framework—coupled with a high 18% slab that dominates most goods—has led to ongoing classification disputes. For instance, whether roti or paratha falls under the 5% or 18% GST rate is not just a bureaucratic absurdity; it reveals systemic inefficiency in the tax’s design.
Structural Inequities Persist: Winners and Losers
One of GST’s touted goals was to create a more equitable fiscal landscape between producing and consuming states. But the results have been uneven. The five largest industrial states—Maharashtra, Karnataka, Tamil Nadu, Gujarat, and Haryana—appear to dominate revenue collections, basking in their role as service and manufacturing hubs. Together, they contribute over 40% of GST revenues. Meanwhile, agriculturally dependent states like Punjab have faced sharp revenue declines. Punjab’s fiscal fragility is especially alarming, given its heavy reliance on agriculture, which remains largely outside GST’s ambit.
Revenue performance aside, GST compliance remains riddled with loopholes. The tax-to-GDP ratio, a fair proxy for gauging its efficacy, has declined from 6.5% in 2015-16 (pre-GST era) to 5.5% in 2023-24. This numeric retreat underscores structural flaws—rampant invoice fraud, underreporting, and the ineffectiveness of digital compliance checks like the e-way bill system in stemming revenue leakages.
The termination of the compensation mechanism has further strained states. Smaller and less industrialised states have faced intensified deficits without this safety net. While states like Rajasthan and Jharkhand are heavily dependent on GST revenues, they lack the consumption base to offset their losses, locking them into a cycle of fiscal dependence on the Centre. This undermines the federal principle established in the Constitution, creating what can only be described as structural inequity.
Lessons from New Zealand’s GST Model
India’s GST structure stands in stark contrast to New Zealand’s highly simplified model. New Zealand introduced GST in 1986 with a flat rate of 10%, later revised to 15%, applicable to nearly all goods and services without exemptions. This simplicity has reduced administrative burdens and compliance challenges, leading to a tax-to-GDP ratio of over 9%. India’s staggered multi-slab rates, by comparison, not only complicate compliance but also create space for disputes and inefficiency. Could India adopt a more uniform slab structure, or are its socio-political compulsions too distinct for such replication?
Points of Institutional Friction
The GST Council, while designed as a cooperative federal body, often suffers from Centre-state tensions. States have repeatedly complained about top-down decisions, particularly on revenue-sharing formulas and rate revisions. This undermines the consensus-driven ethos that the Council ostensibly represents. For example, the debate over continuing the compensation mechanism underlines chronic trust deficits between states and the Centre.
Equally problematic is IGST settlement. As per the GST Council’s rules, IGST is supposed to reconcile cross-border commerce, but delays in fund transfers between the Centre and states have led to cash-flow challenges. Even well-intentioned initiatives like IT-based compliance (e-invoicing, GSTN infra) have lagged in states with weaker digital ecosystems, creating disparities in enforcement.
The GST also struggles against broader political economy pressures. High tax rates on 'sin goods' (like tobacco) and luxury items are politically easier to enforce but encourage evasion, while politically sensitive goods (petroleum, alcohol) remain outside the GST net entirely. This selective approach undermines its promise of being a comprehensive tax regime.
What Should Success Look Like?
For GST to truly “work,” success should be measured along three dimensions: compliance, equity, and sustainability. Metrics such as higher tax-to-GDP ratios, faster IGST reconciliations, and reduced classification disputes should serve as benchmarks. Equally, bringing excluded sectors like petroleum under the GST framework would significantly broaden the tax base. However, achieving these outcomes would require an overhaul of India’s rate structure and institutional strengthening of compliance mechanisms.
At the state level, bolstering SGST mechanisms through capacity-building and technology adaptation remains crucial. The GST Council must also institutionalise a periodic review mechanism to reassess revenue distribution and equity, ensuring governance does not come at the expense of federal fairness.
- Which among the following statements regarding GST is correct?
1. GST is a production-based tax levied on the origin of goods.
2. GST compensates states via the Consolidated Fund of India.
3. GST compensation mechanism ended in 2022.
Answer: (c) 3 only - Which of the following sectors are currently outside the GST ambit?
1. Alcohol for human consumption
2. Petroleum products
3. High-value jewellery
Answer: (a) 1 and 2 only
Practice Questions for UPSC
Prelims Practice Questions
- Being a destination-based tax, GST revenue is intended to accrue to the state where goods or services are consumed rather than produced.
- A destination-based GST design, by itself, guarantees that industrially strong producing states will not dominate GST collections.
- The ending of the GST compensation mechanism can heighten revenue risks for smaller and less industrialised states.
Which of the above statements is/are correct?
- A multi-slab rate structure can increase classification disputes and administrative complexity.
- Digital compliance tools like the e-way bill system have been fully effective in preventing revenue leakages under GST.
- New Zealand’s relatively uniform GST structure is associated with lower administrative burdens and a higher tax-to-GDP ratio (over 9%) compared to India’s recent ratio.
Which of the above statements is/are correct?
Frequently Asked Questions
Why can a record monthly GST collection still signal fiscal stress for several states?
A high aggregate GST figure can mask sharp state-wise divergences, where a few industrial hubs account for a disproportionate share of collections. When compensation has ended and compliance leakages persist, weaker states face higher revenue volatility despite headline gains.
How does GST’s “destination-based” design affect producing vs consuming states, and why does imbalance still persist?
In principle, destination-based taxation assigns revenue to the state where goods/services are consumed rather than produced, aiming to reduce producer-state advantage. However, states with large service/manufacturing ecosystems and stronger compliance capacity still dominate collections, keeping fiscal disparities entrenched.
What institutional and constitutional framework underpins GST, and where do key frictions arise?
GST was introduced in 2017 through the 101st Constitutional Amendment Act, with the GST Council as the policy forum and central/state tax departments handling administration. Frictions arise when states perceive decisions on rates or sharing as top-down, weakening the cooperative-federal intent of consensus.
What does the decline in the tax-to-GDP ratio indicate about GST performance and enforcement?
A fall in tax-to-GDP from 6.5% (2015-16) to 5.5% (2023-24) suggests that collections have not kept pace with the economy, indicating structural weaknesses. The article links this to invoice fraud, underreporting, and limited effectiveness of digital compliance checks like the e-way bill in plugging leakages.
Why does India’s multi-slab GST rate structure create inefficiencies, and what lesson is drawn from New Zealand?
Multiple slabs and a dominant 18% rate invite classification disputes (e.g., roti vs paratha) and raise compliance costs, indicating design inefficiency. New Zealand’s near-universal coverage with a flat rate (10% initially, later 15%) is cited as simpler and associated with a tax-to-GDP ratio of over 9%.
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