Goods and Service Tax and its implications on revenue efficiency of sub-national governments in India: an empirical analysis

Abstract

Purpose

The purpose of the current study is to examine the implications of the implementation of Goods and Service Tax (GST) on the revenue efficiency of the sub-national governments in India. Furthermore, the study aims to compare the revenue efficiency of the Indian states for the pre-GST and post-GST periods in India.

Design/methodology/approach

The study has used the annual revenue of value-added tax (VAT)/GST of the Indian states for the period ranging from 2012–2013 to 2020–2021 for the pre- and post-GST periods. The empirical results are based on the panel regression model for examining the implications of GST adoption on the Indian states.

Findings

The analysis shows that the implementation of GST in India has negatively impacted the revenue efficiency of the Indian states. Moreover, the results affirm that the contribution of the service sector to the state's Net State Domestic Product (NSDP), credit-deposit ratio (CDR) and outstanding net bank credit (ONBC) ratio of schedule commercial banks (SCBs) positively and states' dependency on central transfers (DCT) negatively impact the tax revenue efforts of the state governments. Furthermore, the GST adoption has a greater impact on the revenue efficiency of the minor states in comparison to major states which may widen the inter-state disparity gap as GST revenue constitutes a major share in the Own Tax Revenue (OTR) of the Indian states in aggregate.

Practical implications

The current study will act as a guide for government, policymakers and for the sitting of the fifteenth finance commission in India for future policy formulation on GST and compensation to the Indian states. Similarly, this study can be used as a base for conducting future studies on the implications of GST at the national, sub-national, and international levels.

Originality/value

Previous studies on the implications of GST are theoretical and conceptual. There is hardly any study at the national or sub-national level that has focused on the implications of GST on the revenue efficiency of the Indian states.

Citation

Garg, S., Priyanka, Narwal, K.P. and Kumar, S. (2023), "Goods and Service Tax and its implications on revenue efficiency of sub-national governments in India: an empirical analysis", American Journal of Business, Vol. 38 No. 4, pp. 193-210. https://doi.org/10.1108/AJB-09-2022-0144