Why in news?

The Government of India reported that GST collections for October 2025 reached ₹1,95,936 crore, marking a 4.6% increase over the same month last year.

The surge, driven largely by Diwali-related festive spending, was described by the Finance Ministry as evidence that economic activity remains strong, with GST revenue continuing its upward trend.

What’s in Today’s Article?

• India’s GST System: A Major Tax Reform
• October 2025 GST Collections at Record High
• PRS Study: GST Revenues Lag Behind Pre-GST Regime
• The Larger Fiscal Takeaway

India’s GST System: A Major Tax Reform

• The Goods and Services Tax (GST), launched in 2017, replaced multiple indirect taxes such as excise duty, VAT, central sales tax, and entry tax at both central and state levels.
• It was envisioned as a landmark reform to simplify taxation, improve compliance, and boost revenue by integrating India’s fragmented tax system.
• GST follows a destination-based model, ensuring that tax revenue accrues to the state where goods or services are consumed rather than produced.
• GST: What Changed in the Economy
  • Common Market & Logistics: Removal of border check posts and harmonised rules cut transit times and inventory buffers; favoured scale efficiencies and national distribution models.
  • Compliance Digitisation: E-way bills and e-invoicing (B2B) create a near-real-time ledger of transactions, improving invoice matching and ITC discipline; supports analytics against fake invoicing.
  • Formalisation: By tying ITC to tax-paid acquisitions, GST nudged firms into the formal chain, raising PAN-based registrations and digital payments; widened the data exhaust for credit underwriting.
  • Public Finance: IGST settlement and data granularity improved fiscal transparency.
• GST: Where the Numbers Disappoint
  • Revenue Buoyancy: Collections have grown, yet aggregate GST yield has not consistently matched the pre-GST combined taxes in GDP terms.
  • State Divergence: Consumption-heavy, service-oriented states tend to do better; several manufacturing/mineral states saw relative shortfalls vs. pre-GST subsumed taxes.
  • Compliance Friction: MSMEs face frequent return cycles, credit reversals, and place-of-supply disputes. Inverted duty structures (inputs taxed higher than outputs) trap ITC and create refund backlogs.

October 2025 GST Collections at Record High

• According to the Finance Ministry’s latest release, GST revenues reached ₹1,95,936 crore in October 2025, a 4.6% increase over October 2024.
• The surge was driven by festive demand during Diwali, reflecting robust consumption.
• However, behind this strong national figure lies a divergent state-wise performance.
• Industrial States Lead, But 20 States See Revenue Decline
  • The government noted that industrial and service-oriented states — Maharashtra, Karnataka, Gujarat, Tamil Nadu, and Haryana — together contributed over 40% of total GST collections, reaffirming their role as India’s key production and consumption hubs.
  • Yet, 20 states and union territories recorded a contraction in GST revenues compared to October 2024, exposing uneven revenue growth across the federation.

PRS Study: GST Revenues Lag Behind Pre-GST Regime

• A study by PRS Legislative Research revealed that aggregate GST revenues remain below pre-GST levels.
  • Revenue from subsumed taxes declined from 6.5% of GDP in 2015–16 to 5.5% in 2023–24.
• The 15th Finance Commission had projected a GST-to-GDP ratio of 7%, a goal yet to be achieved.
• For states, average SGST collections (2.6% of GDP) during the GST period have been lower than the 2.8% share from subsumed taxes in the four years before GST.
• This indicates that several states are financially worse off under the GST system compared to the earlier regime.
• States Gaining vs. Losing Under GST
  • While most states saw a decline, five northeastern states — Mizoram, Nagaland, Sikkim, Meghalaya, and Manipur — improved their subsumed tax-to-GSDP ratios compared to pre-GST years.
  • In contrast, Punjab, Chhattisgarh, Karnataka, Madhya Pradesh, and Odisha experienced the largest revenue declines relative to their gross state domestic product (GSDP).

The Larger Fiscal Takeaway

• India’s GST system, though efficient and unified, continues to show imbalances in state-level revenue outcomes.
• While overall collections are rising, the distributional disparities between industrial and smaller states highlight the need for reforms to make GST more equitable and revenue-neutral across the federation.