GST adoption has given India’s north-eastern states a big developmental push

The presence of GST and the compensation arrangement has been a boon to the resource-constrained north eastern states.
The presence of GST and the compensation arrangement has been a boon to the resource-constrained north eastern states.

Summary

  • It has not just boosted state finances but also raised taxation efficiency, enabling the region to fast-track economic growth.

The unprecedented development of India’s Northeast after 2014 has been widely attributed to a significant push by the central government to various infrastructural projects, ranging from roads and railways to new airports. Though these efforts have played a very important role in boosting the region’s economy, another policy measure that has helped the north-eastern states was India’s 2017 introduction of the goods and services tax (GST). The significant rise in their tax collections has equipped them with resources to push developmental initiatives and become actively contributing stakeholders in the Centre’s efforts to build massive infrastructure across the Northeast. According to the Reserve Bank of India’s report on state finances released in January 2023, the country’s north-eastern states have been the biggest beneficiaries of the GST regime, recording a compound annual GST revenue growth rate of 27.5% since implementation in 2017-18 till 2022-23, much higher than for all states. This rate is also higher than the 9% tax revenue growth recorded before the switch to GST.

A review of past data on tax collections in the region shows that the uptick after the GST rollout can be attributed to two reasons. North-eastern states except Assam, Meghalaya and Tripura did not receive any central sales tax (CST) revenue prior to GST implementation, as they’re primarily consumer states with hardly any manufacturing activity. However, GST is levied at the point of consumption—unlike CST, which was an origin-based tax that was subsumed by GST—and so the switch has been a boon for all states that have greater consumption than production. The second factor that led to higher tax collections is increased compliance under the GST regime. The use of a tax-credit system for inputs means it inherently incentivizes end-to-end compliance, as the mechanism has self-policing built into the process that stops refund claims in case of tax evasion at any point during the movement of goods along a supply chain. Further, extensive use of technology has made collections far more efficient. For example, Assam recently used big-data software to digitally identify various mismatches in tax due and tax paid by various parties and collected nearly 30 crore in settlements. Back when GST was rolled out in 2017, the total number of registered taxpayers (migrated) was around 94,000 in all seven states of the Northeast region. This has increased to around 335,000 as of now (130,000 Centre plus 205,000 state), a manifold expansion of the tax base. The total revenue contribution from the region to the central exchequer has also gone up to around 20,000 crore annually, of which 8,000 crore is from GST and 12,000 crore from central excise.

(graphic:mint)
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(graphic:mint)

The flow of tax devolution and grants in aid from the Centre has also increased manifold. To put this in perspective, Arunachal Pradesh, for example, has had a 1,665% increase in tax devolution from the Centre in the period 2014-24, amounting to 101,454 crore, compared with 5,749 crore in the period 2004-14. This is one of the sharpest rises in devolution for any state. Mizoram, Manipur, Nagaland and Sikkim have also had a more than 500% rise in devolution during the period, giving them enough fiscal space to carry out fast-paced development work.

Even without GST compensation and devolution, the north-eastern states witnessed high tax buoyancy, as state GST collections rose rapidly. After GST, the average tax growth of all states in the country was 12.3%, while nominal GDP growth was 9.8%, resulting in a buoyancy ratio of 1.22 in the period 2018-23. While state revenues grew fast, those of north-eastern states grew faster. Their GST revenue growth was 15.71% in 2021-22 and 16.47% in 2022-23. In 2023-24, GST revenue growth for the Northeast region in the first quarter was 16.39%, making it an outperformer again.

The implementation of GST has also had spillover effects on the revenue collection mechanism of states and streamlined other tax collection processes. This is evident in the sharp rise in these states’ revenue collections from other sources. Despite their strong revenue performance, some of these states had been receiving GST compensation even before the covid pandemic’s constraints on economic activity came into effect, reflecting the central government’s commitment towards the Northeast and the federal structure of our democracy. Hypothetically, if there had been no GST during covid, there would have been no compensation to states and no back-to-back loans for compensation either; so the states would have faced a collapse in revenue. But the presence of GST and the compensation arrangement has been a boon to the resource-constrained north eastern states. GST has also had a key role in balancing the vertical fiscal imbalance between north-eastern states and the Centre and improving the same at an aggregate level for the country.

The additional revenue that the country’s north-eastern states have realized under the GST regime has enabled them to invest heavily in infrastructure development, as is visible in the manifold rise in allocations for capital expenditure in their budgets. GST has also enabled them to participate more actively in the national market and benefit from increased trade and investment opportunities.

The generous compensation package and fortuitous rise in tax revenues should be used by these states to unlock their economic potential, even as they tap new sources of revenue, rather than slip into tax complacency. The true potential of this natural economic zone, or ‘Ashtalakshmi’ as the Northeast is often termed, can only be realized if we mobilize much-needed resources for the development of the region and the GST regime sustains its strong revenue performance.

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