In June 2017, when goods and services tax (GST) was launched in India in a grand midnight event in Parliament promising to turn India into a “one nation, one tax” market, a 14 percent annual growth in revenue collections for states were assumed.

The Centre promised to compensate states for any shortfall below that growth, demonstrating its intent to walk the talk on the hypothesis that GST will eventually lead higher, not lower, revenues for states.

India collected Rs 1.52 lakh-crore in GST in October, the second-highest ever collection, the finance ministry said on November 1.

Monthly GST revenues have been more than Rs 1.40 lakh-crore for eight months in a row.

“The revenue for October 2022 is the second highest monthly collection, next only to the collection in April 2022 (Rs 1.68 lakh-crore) and it is for the second time the gross GST collection has crossed Rs 1.50 lakh-crore mark,” the finance ministry said.

One of the several reasons why the GST’s implementation has faced political hurdles is the fear that it could rob state governments of their fiscal powers, leaving them with very little fiscal elbow room to raise revenues. The big question, of course, was what if revenues for states fell short after the GST came into force?

This was addressed by a safety net of sorts, with the Centre promising to compensate states for any revenue shortfall, calculated on a 14 percent annual growth rate.

For a GST revenue base of Rs 100 in a year, a state is guaranteed an annual revenue of Rs 114. If it is unable to generate Rs 114 from its own share of GST revenue, the Centre promised to bridge the gap.

A comparison between the GST collections in October 2021 and October 2022 makes for an interesting picture. The gross GST collection was Rs 1.30 lakh-crore in October 2021. The GST revenue for states, on an average, have grown at 18 percent between October 2021 and October 2022.

Ceteris paribus, shorthand for other things remaining the same, persistently high GST collections should mirror greater economic activity. Importantly, since the GST is a destination-based tax, implying the tax is collected at the point of consumption, a higher GST should imply greater consumption of goods and services (both business-to-business, and business-to-consumer) on a comparative basis.

While evidence from shop-end data (higher sales of cars and consumer goods) may suggest that businesses and households have bought and sold more goods and services, this may not necessarily be the cause for a sustained spike in the GST collections.

Monthly GST collections have remained consistently above the Rs 1.4 lakh-crore, which broadly coincides with a persistent rise in India’s inflation levels.

The hardening of global commodity prices also appears to have contributed to the steady rise in the GST collections, as is evident from the integrated GST (IGST) collections.

October is a case in point. Of the Rs 1,51,718 crore gross GST revenue collected in the month, which Central GST was Rs 26,039 crore, State GST was Rs 33,396 crore, IGST was Rs 81,778 crore (including Rs 37,297 crore collected on import of goods), and cess collections stood at Rs 10,505 crore (including Rs 825 crore collected on import of goods), which is the second-highest till date.

Inflationary pressures aside, the consistently steady rise in monthly GST collections, also mirrors greater compliance levels due to procedural tightening, and greater enforcement.

The important side note of the GST collections, however, are in the disaggregated states’ data. While the headline 18 percent growth in states GST revenues appears impressive at first glance as it exceeds the 14 percent base growth assumptions by a fair margin, there are quite a few laggards.

In all, 17 states and union territories (UTs) saw their GST revenues rise by less than 14 percent in October. Several states saw a fall in their GST revenues year-on-year.

Central excise duty, additional excise duty, duty levied under the Medicinal and Toiletries Preparation Act, service tax, countervailing duty, special additional duty of Customs, VAT, CST, entertainment tax, octroi, purchase tax, luxury tax, taxes on lottery, betting, gambling, and cesses and surcharges. Before June 30, 2017, India’s indirect tax structure was an untidy gobbledygook of these and much more.

The GST offered a single shot solution by merging all of these. It has taken five years, punctuated by two pandemic years, for revenues to stabilise. This now needs to be made less inflation-dependent, and also better balanced collections across states, where most states’ GST revenue growth consistently remains above the 14 percent mark.