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Picture Courtesy: Indian Express

Context:

The Government of India released data for Goods and Services Tax (GST) collections in October 2025. The total GST revenue was ₹1,95,936 crore, marking a 4.6% increase over October 2024.

What is GST?

GST is a comprehensive indirect tax that replaced multiple taxes levied by the central and state governments, such as excise duty, value-added tax, service tax, and central sales tax. It was designed to create a unified tax system, simplify compliance, and reduce cascading taxes.

Key Features of GST

• Single Tax System: Replaces multiple indirect taxes with one uniform tax.
• Dual Structure: Consists of Central GST (CGST) and State GST (SGST) for intra-state transactions, and Integrated GST (IGST) for inter-state trade.
• Destination-Based Tax: Tax revenue goes to the state where goods or services are consumed, not where they are produced.
• Input Tax Credit: Businesses can claim credit for taxes already paid on inputs, reducing the cascading effect.

Key Findings from the recent GST collection:

• In October 2025, GST collections in India rose to ₹1,95,936 crore, showing growth in consumer spending, especially during festivals.
• Industrial and service-heavy states like Maharashtra, Karnataka, Gujarat, Tamil Nadu, and Haryana contributed over 40% of total GST collections.
• Despite overall growth, 20 states and union territories saw a decline in GST revenue in October compared to pre-GST levels.
• Analysis by PRS Legislative Research shows that aggregate GST revenue is still lower than taxes collected before GST.
• For states, average SGST collections (2.6% of GDP) during the GST period have been lower than the 2.8% share from subsumed taxes in the four years before GST.
• Improved Revenue: Mizoram, Nagaland, Sikkim, Meghalaya, and Manipur saw better revenue ratios than before GST.
• Revenue Decline: Punjab, Chhattisgarh, Karnataka, Madhya Pradesh, and Odisha experienced the largest drops in revenue relative to their GDP.

What are reasons behind lag in GST collections compared to Pre-GST era?

Revenue Distribution Formula

• GST is destination-based, meaning the tax goes to the state where goods or services are consumed, not where they are produced.
• States that are primarily producers but not large consumers often receive less revenue than under the pre-GST system.

Subsumed Taxes and Transitional Losses

• Pre-GST, states collected several taxes such as VAT, entry tax, luxury tax, and excise.
• The consolidation of these taxes sometimes led to lower effective revenue for states that previously relied heavily on them.

Lower GST-to-GDP Ratio

• Aggregate GST revenue is lower as a percentage of GDP than pre-GST taxes.
• PRS Legislative Research shows revenue from subsumed taxes fell from 5% of GDP in 2015–16 to 5.5% in 2023–24.

Structural Issues in State GST

• Some states have weak tax compliance or fewer registered taxpayers.
• Informal sectors and small businesses contribute less under GST because of thresholds and compliance challenges.

Sectoral and Regional Variations

• States dependent on agriculture or informal sectors often collect less GST than industrialized, service-heavy states.
• For example, states like Punjab, Chhattisgarh, and Odisha saw large declines relative to their pre-GST revenues. 

How to reverse the trend?

Strengthen Compliance and Administration

• Improve tax compliance through better technology, digital invoicing, and automated monitoring.
• Simplify GST filing and reduce procedural burdens for small and medium enterprises.

Rationalize GST Rates and Structure

• Review GST rates to minimize cascading effects and make compliance easier.
• Ensure that rates are consistent across sectors to reduce evasion and disputes.

Address State-Specific Disparities

• Modify the revenue-sharing formula to better support producer states that lose out due to the destination-based model.
• Ensure timely and adequate GST compensation to bridge gaps until states stabilize their revenues.

Promote Economic Growth and Consumption

• States can encourage industrialization, services, and consumption-driven growth, which increases GST revenue naturally.
• Investment in infrastructure, tourism, and services can expand the taxable base.

Enhance Public Awareness and Digital Literacy

• Educate businesses and citizens about input tax credits, filing requirements, and benefits of compliance.
• Reduce evasion and underreporting by making compliance easier and transparent.

Encourage Use of Technology and Data Analytics

• Leverage big data, AI, and analytics to identify tax leakages and high-risk sectors. 

Conclusion:

GST has unified India’s indirect tax system, simplified compliance and promoting a common market. However, its benefits have been uneven across states due to economic structure, industrialization, and administrative capacity. Case studies show that technology, efficient administration, formalization of informal sectors, and policy adjustments are key to maximizing revenue. With focused measures, GST can become a tool for equitable growth and stronger national economy.

Source: India Express