This article is written by Lokesh Vyas, of Institute of Law Nirma University. The article talks about the states which have benefited most from the introduction of Goods and Services Tax (GST).

Introduction

It is very difficult to accept change but it is the law of nature so a person cannot spare himself from change. The introduction of goods and services tax (GST) in Indian Taxation System was a huge step taken by the Indian government. Its advent caused a lot of hue and cry in the country. GST is described as an action without application of mind. Many people allege that it is a complex, vague and ambiguous. It is often argued that the procedure and implementation of GST are difficult for Chartered Accountants and other people from commerce, so expecting an individual to understand this would not only be inappropriate but also be unjust. The introduction of GST, even after getting criticised by academicians, scholars and, laymen has benefited some states.

To understand the benefits of GST to a particular state, first, we need to have the conceptual understanding of GST and how it works.

Conceptual Understanding of GST in India

The advent of GST is the end result of the step taken by Atal Bihari Vajpayee Government in 2000. After one and a half decade struggle finally on 1st July 2017 India had joined the league of countries that have GST. The One Hundred and Twenty-Second Amendment Bill of the Constitution of India, officially known as The Constitution (One Hundred and First Amendment) Act, 2016, finally introduced a national Goods and Services Tax in India from 1 July 2017.

GST is an indirect tax levied by both the Center and the State governments on the goods and services. It is levied from all the stakeholders starting from the manufacturer to final consumer.

Types of GST

In India goods and services tax is divided into four part as follows:-

1.) Center Goods and Services Tax (CGST)- It is levied by the central government.

2.) State Goods and Services Tax (SGST)- It is levied by the state government.

3.) Integrated Goods and Services Tax (IGST)- It is levied on inter-state trade or import and equivalent to both CGST and IGST.

4.) Union Territory goods and Services Tax (UTGST)- It is levied when the supply of goods and services take place in any of the 5 territories except Delhi and Pondicherry as they have been given the status of semi-state.

The Principle of GST

GST is known as a Consumption based tax because it works on the destination principle. According to this principle, the tax is levied in the place where the goods and services are finally consumed.

The GST Benefited States in India

To understand GST and its benefits, first, we need to understand the meaning of Input Tax Credit (ITC). Input tax credit is an essential feature of GST. It means that at the time of paying taxes on the sale, a person can reduce the tax that he has already paid on purchases, means the tax is only required to be paid on the additive value. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

This whole process describes a situation where the consumer will get the most out of GST. This concept of input rate is not foreign to Indian taxation System and already existed in India but now it exists with a wider scope. GST saves a person from the vicious circle of “Tax on Tax” and allows a person to pay tax only on the value that is an addition.

Types of the Indian States and the effect of GST

Although there is no mathematical formula to categorize Indian states yet generally states are categorized under two binary heads i.e. rich and poor. All Manufacturing states which have higher tax collection are generally called rich states because they produce more in the country like Maharashtra, Gujarat etc. on the other hand the poor states are those states which have the least production of good and services and whose tax revenue is low, resulting in the fact that they export the least e.g. Bihar.

All those states which are ahead in consumption and lagging behind in manufacturing, are said to be benefited most from the introduction of GST. GST is a single tax on the supply of goods and services which starts with the manufacturer and ends with the final consumer. It aims to create in India, a common national market.

Comparison between manufacturing states

As per the data released by the finance ministry for GST, there is a huge increase in the number of GST registration in Maharashtra, UP, Tamil Nadu and Gujarat. Most of them are voluntary registrations by small enterprises (see here). If the number of GST registrants are more, that state would get more revenue as against those states which have less GST registrants. This is just one part of the story. So here the comparison is between rich states vs. rich states or manufacturing state vs. manufacturing state. In this scenario, when the comparison is amongmanufacturing states which shows that the state with more GST registrants would have more revenue than the state with fewer GST registrations.

As per the data Maharashtra, Uttar Pradesh, Karnataka, Chattisgarh, Tamil Nadu and Odisha are top contributors of GST in first five-months of GST (till 30 November 2017) (see here). These data do not suggest that these are the states which have benefited most out of GST because they have not been comparatively analyzed with the low manufacturing states. The same data show that Mizoram, Manipur, Nagaland, Arunachal Pradesh are the lowest tax revenue earning states which again do not imply that these are the states that suffered the most.

Comparison between the highest earning and lowest earning states will not show the right result because there are a lot of factors that affect the tax revenue of any particular state e.g. population, industries, nature of the state etc. therefore the variables are not comparable.

For compensation see here

For tax revenue see here

The Rich States vs the Poor States

The actual benefit or loss depends upon the factors of productions and consumption, means if a state is manufacturing or producing state it will benefit the least from the introduction whereas if a state is a consumption state, the introduction of GST will benefit it the most. GST is expected to benefit the poor states because they produce less and consume more and GST is a destination tax.

For example:- Before GST, if Maharashtra sold goods to U.P. only Maharashtra will get benefited because it gets both tax income and profit and at the same time U.P. gets nothing.

After the introduction of GST, both the states get benefits from a transaction because GST is a destination or consumption-based tax, therefore, U.P. (consumption state or where the goods/services are finally reaching) will get tax income and Maharastra will get profit.

Although both the states are getting some benefit under GST regime yet the producing or manufacturing state (i.e. Maharashtra in the above example) will get less than what it used to get under the previous regime.

The above-mentioned example explains the metric of calculating benefit or loss to any state.

Ideally, GST should be neutral to every state which means that neither should it benefit any particular state nor should it harm the revenue of any state. To ensure this neutral affect the central government has ensured the states to give compensation for initial five-years for the likely losses. The Central government has given a criterion i.e. the states that have tax revenue growth of less than 14% after the introduction of GST will be compensated by the center. (see here)

A final authoritative list to show the impact of GST on the states has not been revealed yet. But going with the conceptual understanding of Goods and Services Taxes it can be concluded that that Maharashtra, Gujarat, Karnataka, Tamil Nadu and Telangana will suffer the most by GST because they are the leading manufacturing states and account for 70 percent of the country’s exports (see here) but Maharashtra and Tamil Nadu are also consumption states so they’ll bear less loss when compared to other producing states. States like Assam, Bihar, Odisha, Jammu and Kashmir, and Uttar Pradesh who were more dependent on the center, and raise 40% or less of their total revenue on their own, will get more benefit from the introduction of GST (see here). This happens because GST is a more distributive indirect tax.

Moreover, states such as Delhi, Maharashtra, Tamil Nadu, and Karnataka which are less dependent on the center and generate a majority of their revenue on their own will get fewer benefits from GST when compared to their own data pre-GST regime.

States like Delhi, Punjab, Haryana, Maharashtra, Tamil Nadu and Karnataka earn the maximum revenue from their own taxes whereas states such as Jammu and Kashmir, Assam, and Bihar only get around 20% of their revenue from taxes. The latter kind of states will get benefit from GST as against those which are producing states. This difference is noteworthy because it implies the dependency of latter kind of states on transfers from the center, i.e. devolution of central taxes and grants (see here). Moreover, the low manufacturing states like Kerala and West Bengal are expected to benefit from the introduction of GST.

After the introduction of GST the dependency of these states on the center will decrease and thus they will become more self-sufficient.

Conclusion

Everything has two facades i.e. negative and positive and both should be taken into consideration before giving any conclusive opinion. Goods and Services Tax aka GST is still in its salad days in India, therefore, making a final and conclusive list of its benefit to states is not practical. GST is a conglomeration of various taxes. There are states like Bihar, Jammu and Kashmir, West Bengal, Kerala and Assam which have benefited from the introduction and there are states like Haryana, Gujarat etc which did not get as much benefit as consuming states. GST is a step in bringing about parity between manufacturing and consuming states but it does not intend to harm the former and benefit the latter. It will thus, take time to conclude the final effects of GST.

References

1. GST collection highest in Maharashtra: State-wise GST collections till date, (https://www.indiatoday.in/education-today/gk-current-affairs/story/gst-collection-mop-up-maharashtra-1116473-2017-12-26)
2. GST data reveals 50% increase in number of Indirect Taxpayers by Press Information Bureau, Government of India Ministry of Finance (http://pib.nic.in/newsite/PrintRelease.aspx?relid=175977)
3. State’s GST tax base second highest after Maharashtra (https://timesofindia.indiatimes.com/city/chennai/states-gst-tax-base-second-highest-after-maharashtra/articleshow/62721308.cms)
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16. Union Budget 2018: States with higher exports show better standard of living, reports Economic Survey of India (https://www.financialexpress.com/budget/union-budget-2018-states-with-higher-exports-show-better-standard-of-living-reports-economic-survey-of-india/1036334/)
17. State 6th in export of goods, services: Economic Survey by Sushil Manav (http://www.tribuneindia.com/news/haryana/state-6th-in-export-of-goods-services-economic-survey/536205.html)  
18. West Bengal to gain from GST: Chief Commissioner (http://www.business-standard.com/article/pti-stories/west-bengal-to-gain-from-gst-chief-commissioner-115042700822_1.html)  
19. Consumer states such as West Bengal and Kerala will benefit under GST: ICAI Indirect Taxes panel chief (https://timesofindia.indiatimes.com/city/mangaluru/Consumer-states-such-as-West-Bengal-and-Kerala-will-benefit-under-GST-ICAI-Indirect-Taxes-panel-chief/articleshow/55749989.cms)
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