Tale Of Unequal Distribution To States
In any federal system, the distribution of revenue from taxes is a crucial aspect of ensuring economic balance and promoting equitable development across regions. However, in India, the states contributing the most to Goods and Services Tax (GST) collections often do not receive the highest share of the revenue distribution. This paradox stems from the design of the GST revenue-sharing model, which aims to ensure that the fiscal needs of all states, especially those with lower economic development, are met.
Data on the collection and distribution of GST showed that Maharashtra has been the leading state contributing nearly 35 to 45 per cent of the total collection every year. Other states like Gujarat, Karnataka, Tamil Nadu and Haryana have also seen an uptick in collection over the years.
In fiscal year 2024-25 (till January), Maharashtra contributed Rs 2,97,685 crore to total GST collection with Karnataka at second with Rs 1,31,949 crore. Gujarat was next with Rs 1,13,252 crore and Tamil Nadu was next at Rs 1,08,626 crore.
While prosperous states generate higher tax revenues due to their industrial activity, consumption levels, and larger population, the system of revenue distribution is structured to provide additional financial support to states with less developed infrastructure and lower tax generation capacity.
This has resulted in wealthier states receiving relatively lower funds, despite being the primary contributors to the national tax pool. Data also revealed that despite being the highest contributor to GST collections, Maharashtra did not receive an equivalent share of GST refunds from the central government. This discrepancy underscores a significant concern regarding the equitable distribution of GST revenues.
Uttar Pradesh stands as one of the states that receives a significant share of GST returns, reflecting a notable trend in the distribution of tax revenues. During the specified period, the state contributed a substantial Rs 93,100 crore to the national GST pool, and it received Rs 60,572 crore in return. West Bengal is another state that received high GST returns in comparison to its contribution. It contributed Rs 55,268 crore in fiscal year 2024-25 (till January) and received Rs 35,884 crore in return.
States Vs Centre
Several states have criticised the GST system, particularly regarding its revenue-sharing model, the compensation mechanism and its impact on their economies. Criticism has primarily come from states that either contribute significantly to the GST pool or face challenges in receiving adequate returns.
Tamil Nadu Chief Minister MK Stalin, for instance, said that there is an unequal distribution of GST among states. “A situation has arisen wherein there’s no right to ask what the GST on cream bun is... despite the meagre financial allocation we were able to achieve so much. We can make Tamil Nadu the best state in the country if we get full financial allocation,” he said at DMK’s 75th Anniversary in September 2024.
During the 16th Financial Commission conclave in September 2024, Kerala Chief Minister Pinarayi Vijayan called for a higher share for the states from the taxes collected by the Union government. He said since the 15th Finance Commission, Kerala has been demanding to raise the states’ share to 50 per cent considering the “vertical fiscal imbalance between the taxing powers and expenditure obligations of the Union and the states”.
Punjab, too, raised the argument where the state’s finance minister Harpal Singh Cheema highlighted the revenue distribution system at the conclave. “On the one hand, effective devolution is less due to imposition of cess and surcharges. On the other hand, states’ share in centrally sponsored schemes (CSS) increased,” Cheema said. He added that the states have less fiscal space for existing and new state schemes and said that the GST limited the fiscal autonomy of states. “Punjab witnessed a considerable decline in tax revenue in the post-GST scenario,” Cheema said.