Eight years after the rollout of the Goods and Services Tax (GST), revenues from the unified indirect tax system continue to lag behind the levels of taxes it replaced, according to a new report on State Finances released by PRS Legislative Research.
As per the report, aggregate revenue from the central and state taxes subsumed under GST (such as Value Added Tax (VAT), Central Sales Tax, Excise Duty, and Entry Tax) has declined from 6.5 percent of GDP in 2015-16 (pre-GST) to 5.5 percent of GDP in 2023-24. This remains well below the 7 percent GST-to-GDP ratio projected by the 15th Finance Commission for the medium term (excluding GST compensation cess).
For states, the share of subsumed taxes averaged 2.8 percent of GDP in the four years before GST. It dropped to 2.7 percent in the first full year after implementation, fell further to 2.3 percent in 2020-21 during the pandemic, and is estimated to recover to 2.8 percent in 2024-25 (Provisional Actual). Over seven years of GST, the average State GST (SGST) collection as a percentage of GDP has stood at 2.6 percent, still below pre-GST averages.
Under the GST (Compensation to States) Act, states were assured a 14 percent annual growth in SGST revenue for the first five years. Those that failed to meet the growth target received compensation from the GST cess fund until June 2022.
The PRS report also highlights significant state-wise variations. Some North-Eastern states have seen improved tax-to-GSDP ratios post-GST, a trend attributed by the 15th Finance Commission to the destination-based nature of the new tax regime. In contrast, states such as Punjab, Chhattisgarh, Karnataka, Madhya Pradesh, and Odisha have witnessed a sharper fall in revenues compared to the pre-GST period.
To achieve the 7 percent medium-term revenue target, the 15th Finance Commission had recommended simplifying the GST rate structure. Acting on this, the GST Council approved a major rate restructuring in September 2025, setting a basic rate of 18 percent and 5 percent on mass consumption goods, and 40 percent on sin or demerit goods, while exempting certain essential items.
Although the government estimates that the new structure could lead to a revenue loss of Rs 48,000 crore, it hopes that this impact to be offset by higher consumption and compliance under the simplified framework.
