Revenue shortfall, but for how long?

• Some states have renewed the demand for revenue relief as GST undergoes a structural shift. Experts dissect their position

- NARAYANAN V, PRASANTA SAHU & SAIKAT NEOGI Chennai/New Delhi, September 3

THE FINANCE MINISTERS of eight Opposition-ruled states huddled on Wednesday, just ahead of the start of the two-day Goods and Services Tax (GST) Council meeting, and decided to seek compensation for the "revenue loss" likely to be incurred by them, on account of the proposed GST slabs rejig.

On August 21, when the group of ministers on GST rate rationalisation met to review the Union government's proposals to reform the tax, some states had expressed similar concerns. They proposed continuation of the "compensation cess" (which will outlive its purpose by October) or any other suitable mechanism to offset the states' potential revenue shortfall. One southern state even sought the leeway to impose a state-specific cess and a revision of the revenue-sharing ratio, between the Centre and states from 50:50 now to 60:40 in favour of the states.

Have states been better off under the GST system compared to the previous regime of value added tax (VAT)? The answer is both yes and no. A study by Tushar Chakraborty and Tanvi Vipra, published by PRS Legislative Research in October 2023, showed that at least until 2022-23, the final year of the compensation scheme for the states, the direct revenues from GST (state GST receipts) were lagging the receipts from taxes subsumed in GST, primarily VAT, in the previous five years.