Nirmala Sitharaman Says GST Reflects Pro-Poor Approach, Empowers States

As the debate on whether revenues from the Goods and Services Tax have exceeded their pre-GST levels ensues, Finance Minister Nirmala Sitharaman underscored the tax's role in promoting cooperative federalism, being pro-poor and streamlining the tax system.

GST contributes significantly to state revenues, the Finance Minister noted in a post on X, formerly Twitter. States receive 100% of SGST collected in that state, approximately 50% of IGST (Integrated GST accrued on inter-state trade) and a significant portion of CGST, that is also devolved to the states based on the Finance Commission's recommendations, she said. The current formula requires 42% of the pool of central taxes to be distributed among states

The comments come a day after GST Appellate Tribunal President Justice (Retd) Sanjaya Kumar Mishra took oath on Monday — a long-awaited move in operationalising the new judicial mechanism.

Claims for 'fairer tax share' as part of the 'South tax movement' have also emerged recently, with the chief concern being the increasing share of indivisible cess and surcharges.

The Reserve Bank of India's State Finances study of 2023-24 also outlined that the divisible pool had shrunk from 88.6% of gross tax revenue in 2011-12 to 78.9% in 2021-22, despite the 10-percentage point increase in tax devolution recommended by the 15th finance panel, owing to the rising cess and surcharges.

The RBI study advised states to augment their own fiscal capacity rather than depending on transfers.

As an example of cooperative federalism in India and state participation, Sitharaman noted that out of 52 meetings of the GST council, all decisions but one were reached through consensus, alluding to the matter of GST on lottery, where Kerala had a differing view.

"As chairperson of GST council, I have ensured all states' voices are equally heard without bias," she said.

Her comments come in the wake of former Chief Economic Adviser to the government of India, Arvind Subramanian's criticism that despite recovery from the pandemic and better implementation, GST revenue for FY24 with 6.1% of GDP has still not surpassed pre-GST level.

While partly addressing this, Sitharaman mentioned that GST has improved tax buoyancy from 0.72 (pre-GST) to 1.22 (2018-23). Despite compensation ending, state revenues remain buoyant at 1.15, she said.

"Without GST, states' revenue from subsumed taxes from FY18-19 to FY23-24 would have been Rs 37.5 lakh crore. With GST, states' actual revenue amounted to Rs 46.56 lakh crore," she said in her post.

The GST system reflects a pro-poor approach, Sitharaman said, citing the Revenue Neutral Rate, which came down to 11.6% in 2019 from 14.4% in 2017.

RNR refers to the combination of different rates in order to match the Pre-GST revenue generation with revenue under GST.

Despite the GST rate being less than the prescribed RNR and Covid-19 affecting revenues, GST collections (as a percentage of GDP) have now reached the levels they were before GST (both net and gross), demonstrating the system's capacity to efficiently collect revenues, the minister said.

As per data released on May 1, April collections for transactions in March saw the highest ever collection of Rs 2 lakh crore.

Taxes on essential items have been lowered now, compared to pre-GST rates, Sitharaman said. GST has exempted many essential items and services, such as unbranded food items, certain life-saving drugs, healthcare, education, public transport, sanitary napkins, hearing aid parts, agricultural services, and more, she said.

"Common items like hair oil and soaps saw tax cut from 28% to 18%. Electrical appliances taxed at 12% v/s 31.5% before. Movie tickets were taxed lower, too," she said, before adding that tax rate rationalisation has also been done since 2017.

The National Anti-profiteering Authority ensured that companies passed the benefits to the consumers, she said.