Two years after its implementation, the extent to which the Goods and Services Tax (GST) regime is an improvement upon the earlier system of multiple excise and sales taxes remains unclear. As of now, there are several worrying trends. The first is that gross GST collections are short of expectations. Thus, as against a target of Rs 1,12,000 crore per month set for 2018-19, average GST revenues fell short of Rs 1 lakh crore per month.

The shortfall is a problem especially for the States, because while they have given up a significant part of the taxation powers they had earlier and they will be compensated only for five years for any shortfall in revenues.

Second, while month-wise gross GST collections (relative to the corresponding month of the previous year) have been rising almost consistently over time, collections by or due directly to the States have been quite volatile and have not displayed the same consistent rise. This raises concerns about what would be the revenue position of the States three years from now, when the five-year transition period would come to an end.

Two features of the GST revenues from States stand out. One is the strong positive relationship between the GDP of a State and the volume of revenues generated through both the State-level GST and the concerned State’s share of the integrated GST (IGST) collected by the Centre.

This strong positive relationship is surprising because, given the fact that the GST is a destination tax, it was expected to favour ‘consuming States’ as opposed to the richer ‘producing States’, which supply goods and services to consumers in other States besides their own. Even the IGST collected by the Centre is shared with the State where the good or service concerned is sold, not the one in which it was produced. Hence, one should expect ‘consuming States’ to do better.

In whole context, the GST regime not only threatens to deprive States of resources they may have mobilised, but it also worsens the position of poorer States relative to their richer counterparts, and increases their dependence on resources transferred from the Centre.