MC Analysis: MP, Maharashtra biggest GST gainers in post-Covid period

Tax buoyancy of states improved

Madhya Pradesh and Maharashtra have witnessed the highest gains in tax buoyancy post the introduction of the Goods and Services Tax (GST) regime in 2017, according to a Moneycontrol analysis of tax collection data for pre-GST years before 2017 and post-Covid period of FY22-24.

Tax buoyancy, or the ratio of growth of GST collections to nominal output—the value of total goods and services produced in the economy—increased to 2.1 for Madhya Pradesh post-Covid (FY22-24) compared with 0.7 between FY14 and FY17. In simple terms, Madhya Pradesh’s ability to collect taxes tripled after the introduction of the GST regime. In the case of Maharashtra, the jump was nearly four times.

GST was implemented in July 2017, with a central and state component along with an integrated GST, which is shared between the Centre and the states. The analysis includes IGST revenues allocated to the states.

It's not just Madhya Pradesh and Maharashtra that have seen substantial gains in tax buoyancy. Tamil Nadu and Delhi also witnessed significant improvements during this period. Tamil Nadu’s tax buoyancy jumped 197 percent during this period, whereas Delhi’s tax buoyancy ratio increased 134 percent.

While the increase in tax efficiency and responsiveness between the pre-GST and post-COVID period was highest for MP and Maharashtra, Punjab retained its position as the state with the highest average tax buoyancy between FY22 and FY24. Punjab’s tax buoyancy was 2.3 in FY24, 2 in FY23 and 2.7 in FY22.

“(Overall) States’ tax buoyancy has improved in the recent period (FY22 and FY23)… SGST collection has picked up since FY22 with a buoyancy above one, benefitting from the revival in economic activity and increased compliance due to improved tax administration, especially among the larger States,” the central bank noted in December 2023.

An NIPFP study, 'Revenue Performance Assessment of Indian GST', published in April 2023, found that tax buoyancy post-implementation of the tax regime had increased to 1.178 for both the Centre and the states until FY23 compared with 1.039 in the pre-GST period, indicating that the growth in taxes imposed on goods and services had outpaced nominal GDP growth faster than pre-GST years. The results indicate increasing responsiveness of taxes to economic growth.

States' revenues rise

A higher tax buoyancy alone cannot ensure higher tax collection, as nominal growth must be higher for the state to collect more revenue. GST implementation has also given more financial autonomy to the states when measured in terms of a rise in the ratio of their own tax revenues.

An RBI study on state finances published in December 2023 found that the share of own tax revenues in overall tax revenues for states had increased to 65.4 percent in the post-Covid period compared with 62.8 percent between FY16 and FY17, pointing to better revenue growth in own tax revenues compared with transfers from the Centre.

The highest gains accrued for Uttar Pradesh and Telangana, where the ratio of own tax revenues increased nearly 8 percentage points between FY22 and FY23 from FY16 and FY17.

UP, which had a lower own tax revenue ratio than the national average, witnessed the ratio go up to 54 percent from 45.6 percent earlier, whereas Telangana’s jumped to 84.2 percent from 76.4 percent in the pre-GST period.

Bihar and Punjab were the worst performers, with their own tax revenue ratio declining compared with the pre-GST period.

One plausible explanation for Bihar could be a worsening of its tax buoyancy. It was the only state where tax buoyancy had reduced compared with the pre-GST period.

In the case of Punjab, an overdependence on central taxes could have triggered the change.