Why South India’s GST ‘losses’ are a myth
When it comes to India’s Goods and Services Tax (GST), too many economists and politicians may be stuck in the past.
Former RBI Governor Dr. Subba Rao has written an article in the Financial Times titled, “India’s north-south divide is fraying the political compact”[1].
In his article, he agrees with the views expressed by the CMs of Tamil Nadu and AP that the Southern states are “losers” in the GST system, with the South subsidizing the North.
While Dr. Subba Rao’s point about the demographic penalty is valid, the one on GST may not be.
I’m willing to stand corrected if I’m wrong, but I’m reasonably certain I’m not.
Here’s why I argue that the GST didn’t create an injustice; it merely corrected a 70-year-long wrong.
The 70-year illusion
For decades, India ran on a tax model that rewarded geography, not fairness.
Under the old origin-based Sales Tax system in India (including CST), states that made goods pocketed the tax revenue, even when the goods were consumed elsewhere.
This is contrary to the basic tenets of indirect taxes.
IMF, for example, in its publications on taxation, consistently highlights the destination principle as the economically sound and globally accepted approach for indirect taxes, contrasting it with the distortive effects of the origin principle. This is accepted globally.
The logic is that you can only export goods and services, not taxes.
This is why exports (domestic within a country or international) are usually exempt from taxes, but they will be taxed at the importer’s end, to make them at least on par with taxes on locally produced goods and services.
The Indian model, pre-GST, created a profound and persistent fiscal imbalance.
Manufacturing-intensive states, particularly in the South, enjoyed a fiscal bonanza.
How these states became manufacturing-intensive despite their failures of commission and omission, and not necessarily because of any of their accomplishments, is another article of mine, published earlier, titled, “TN: A Gift Of History & Geography, Squandered By Politics”[2].
They reaped the tax revenue from goods that were produced within their borders but consumed by the vast populations of other, less-industrialized states. That most of these states were no better governed is another matter.
Meanwhile, these consumption-heavy states, with their large populations and immense infrastructure needs, were deprived of their rightful share of tax revenue.
So, a car bought by a Bihari family filled the treasury of Tamil Nadu with tax revenues.
A refrigerator used in UP was taxed by Maharashtra.
Bihar and UP had to generate the money and pay their residents, and needed money to develop their infrastructure, but their tax revenue was siphoned off by states that happened to host the factories.
The hosts benefited both ways: job creation and tax revenue collection.
That was not fiscal federalism. That was fiscal feudalism.
Who really benefited?
The producer states that many in the South got fat on this arrangement. There were exceptions to the north-south divide, like Maharashtra.
They were the accidental winners of a colonial hangover that independent India never fixed, as I had explained in my article[2].
It was easier to collect taxes at the manufacturer’s end; no effort was made to pass on the tax revenue to the consumer state.
The manufacturing states had history on their side (ports, colonial investments, and industrial clusters).
They also had geography on their side (access to coasts, trade routes, and resources).
And on top of it, they also had the taxmen on their side, collecting revenue from goods consumed in states hundreds of miles away.
Meanwhile, consuming states, the very places where India’s masses lived, struggled and earned very little, and were starved of resources they badly needed and deserved.
For decades, the North consumed, but the South collected.
GST: Justice at last
Then came GST. A simple idea with revolutionary impact: tax where you consume, not where you produce.
No more sleight of hand. No more fiscal delusions.
If a Punjabi buys a tractor made in Tamil Nadu, Punjab gets the tax revenue.
If a Tamil family buys a Refrigerator made in Haryana, Tamil Nadu gets the tax revenue.
This is not redistribution. This is restitution. Without even an apology for decades of injustice.
The myth of “Southern losses”
Now, critics cry foul. They say the South is losing out.
Losing what, exactly? Not a birthright. Not a legitimate claim. What they’re losing is privilege, an undeserved bonus from a broken system.
It’s like a landlord complaining when bonded labourers are set free. Yes, he “loses” something. But only because he never had a just claim to it in the first place.
If anyone should cry foul, it’s the Northern states, which for 70 years, were robbed of revenues that rightfully belonged to them.
They bore the history load, they bore the geography load, they bore the population load, they bore the consumption load, but their tax revenue was stolen away by the producer states.
The bigger picture
GST has done what no finance commission or planning commission could do: it has finally made taxation fair and equitable. It has:
- United India into a genuine single market.
- Killed the cascading, distortionary taxes of the past.
- Redirected revenue to where citizens live and consume.
This is not North versus South. This is fairness versus favouritism.
A message to the South (from where I hail).
Southern states are right to worry about being punished for controlling their population. That fight is real, and it must be addressed fairly.
But to confuse that with GST is incorrect.
The South was not robbed by GST. It was rescued from delusion.
The North was not subsidized. It was finally recognized.
And India, for once, has a tax system that makes sense.
My view
Dr. Subba Rao is justified in arguing that the South should not be penalized for population control.
But on GST, I think his logic falters.
GST is not a wound; it is a suture. Not wrong; it is a course correction.
For seventy years, producer states lived off an inflated fiscal pipeline. GST cut that pipe and rerouted it to the rightful owners: the consuming states and their citizens.
To call that unfair is not analysis. It is nostalgia.
And nostalgia is not a substitute for economic policy.
Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
Reference:
[1] India’s north-south divide is fraying the political compact – Sept 08, 2025, FT
[2] TN: A gift of history & geography, squandered by politics – Apr 08, 2025, PGurus.com
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