For the first time, the latest CAG 'State Finances 2023-24' report allows a clearer comparison of state revenues before and after GST's implementation. What emerges is not a simple narrative of strong-vs-weak states, but a more nuanced divide: between states that are adapting effectively to the post-GST fiscal architecture, and those that are not.

At the aggregate level, the picture appears modest. In real terms, combined revenue of states grew by about 2% in 2023-24. But headline numbers obscure what matters most: divergence.

Some states, including Bihar, Gujarat, MP and UP, recorded real revenue growth of 6% or more. Others, such as Karnataka, Rajasthan and West Bengal, saw real declines. Even Maharashtra, India's most economically advanced state, posted near stagnant growth. This widening gap is not incidental. It reflects differences in how states are building, or failing to build, their own revenue capacity.

For years, a key concern around GST was that it would centralise fiscal power and weaken states' autonomy. But medium-term evidence now points to a more balanced conclusion: GST has, in fact, strengthened states' tax performance. Gains, however, have been uneven.

In 2018-19, the first year reflecting the full impact of GST, state GST (SGST) accounted for about 41% of states' own tax revenue (SOTR). By 2023-24, this had risen to 43%. Average annual growth in SOTR increased from around 9.5% in pre-GST period to 11.7% since. SGST itself grew at an average annual rate of about 13%.

These trends suggest that GST has made state tax revenues more buoyant. Improvements in compliance systems, invoice matching and formalisation of economic activity have expanded effective tax base. In that sense, GST has delivered more than many critics anticipated.

But this is only part of the story. GST has helped states, but it has not compensated for weak fiscal management. New data makes it clear that states can still underperform even when GST collections remain robust. That is because fiscal strength depends on more than SGST. It also hinges on non-tax revenues (NTR), asset monetisation, returns from PSUs, and balance between self-generated resources and GoI transfers.

Karnataka illustrates this complexity. It remains one of the most fiscally self-reliant states, with their own tax revenue contributing around 70% of total revenue, well above the national average of roughly 50%. Yet, it recorded a real decline in total revenue in 2023-24. A strong tax base was not enough to offset weakening non-tax revenues and reduced asset monetisation.

The situation is more concerning in Rajasthan and West Bengal. Both states combine relatively weak own tax shares with declining non-tax revenues and higher dependence on central transfers, a fiscally fragile mix.

A closer look at states with declining revenues reveals a common pattern with a fall in the share of NTR. This component, which includes dividends from state public enterprises, royalties from natural resources, user charges, and income from land and forests, reflects a state's ability to monetise assets and enforce pricing discipline. Persistent weakness here signals a structural problem rather than a cyclical one.

Composition of tax revenues also offers important insights. West Bengal, for instance, derives a relatively large share of its own tax revenue, about 45%, from SGST. Karnataka and Rajasthan show similar patterns, though to a slightly lesser extent. While a higher SGST share can indicate strong domestic economic activity, in West Bengal's case, it coexists with a weak tax base. This points to deeper issues in translating economic activity into sustained fiscal strength.

In contrast, UP presents a noteworthy shift. Traditionally seen as fiscally constrained, it emerged as one of the stronger performers in 2023-24. Its revenue growth appears to be supported not just by GST but also by other taxes and excise. This diversification is critical. States that rely on a broader revenue base are better equipped to manage shocks.

The broader lesson is becoming clear. GST has worked better for states than many expected. Rise in SGST's share, acceleration in SOTR growth and sustained expansion of GST collections point to improved tax buoyancy.

But GST is not a substitute for sound revenue strategy. States that strengthen NTR, monetise public assets effectively, maintain a competitive business environment and reduce excessive reliance on central transfers will enhance their fiscal autonomy. Those that do not will continue to drift toward greater dependence, regardless of how well GST performs.

That is the real fiscal divide in India today. GST has created an opportunity. Some states are leveraging it. Others are merely subsisting on it.