THE IGST CONUNDRUM: WHY KERALA’S TAX REVENUES ARE’NT MATCHING ITS COLLECTIONS

On 1st July 2025, when the Thiruvananthapuram Zone was celebrating the 8th Anniversary GST day, the chief Guest, Hon’ble Finance Minister of Kerala Shri. K.N. Balagopal made a remark about the low receipt of tax to Kerala stated as follows:

“65% of goods consumed in Kerala are imported from other states, yet our share of IGST remains disproportionately low.”

The above compelling observation reflects not a paradox, but a deep structural flaw in the GST ecosystem. For a consumption-heavy state like Kerala, the GST model—based on destination-based taxation—should ideally work in its favour. In fact the then FM Shri. Thomas Issac was pretty sure about the high IGST receipt and made his understanding public. However, reality diverges from theory. Kerala, despite being a net importing state, receives lower-than-justified IGST settlements. This paper is intended to analyse the reasons for such a short fall

Understanding IGST: The term “Design vs Delivery Gap” in GST: A Closer Look

The phrase “Design vs Delivery Gap” refers to the disconnect between the intended goals of a policy framework (its design) and how it actually functions in practice (its delivery or implementation). In public finance and tax administration, this gap can have serious implications—especially for revenue distribution and fiscal federalism.

The Design of GST: What Was Promised

India’s GST framework, implemented in July 2017, was designed on three foundational principles:

1. Destination-Based Consumption Tax:
   • The state where goods or services are consumed should receive the revenue.
   • This was meant to benefit consumer states like Kerala.
2. Seamless Flow of Input Tax Credit (ITC):
    
   • To avoid cascading effect of taxes and encourage compliance.
3. Cooperative Federalism:
   • A system where Centre and States jointly manage indirect taxes.
   • The GST Council, with equal representation, would resolve disputes and evolve policy.
4. Technology-Driven Compliance:
    
   • A centralised, algorithm-driven portal (GSTN) would handle return filings, credit matching, and cross-verification, making tax administration efficient and transparent

In this ideal design, Kerala—being a services-oriented, consumer-dominated economy—should have gained significantly from GST, especially via IGST on inter-state imports of goods and services.

But the Delivery Fell Short: What Actually Happens

In practice, it appears, multiple fault lines might have emerged, especially in the IGST architecture:

1. IGST Stuck in the Centre’s Coffers

In design:

• IGST collected by the Centre was to be promptly and proportionally distributed to the destination state.

In delivery:

• Settlement is delayed, infrequent, and opaque.
• The Centre uses a complex reconciliation process that is alleged to be not real-time.
• It appears States have no visibility into the algorithm or criteria being used for apportionment.
• Kerala often receives less than its due share as per FM’s speech.

2. Consumption Happens, but Credit Doesn’t Reach the State

In design:

• Consumption is the basis of revenue entitlement.

In delivery:

• If the recipient is a consumer or non-tax-filer (e.g., a college, hospital, or PSU), there is no matching return in the system.
• The Centre holds the IGST paid by the supplier, and Kerala receives nothing, even though the goods were physically consumed in the state.

3. Compliance Relies on Supplier Accuracy

In design:

• The GST system was meant to be self-policing through invoice matching and return filing.

In delivery:

• The system relies entirely on the supplier in the originating state to correctly declare:
  • The state code,
  • The buyer’s GSTIN,
  • The place of supply.
• It appears, Kerala has no way to verify or rectify wrong entries.
• There is no mandatory system-wide correction to fix these errors.

This leads to a situation where goods come to Kerala, taxes go elsewhere.

4. B2C Transactions and Informal Supply Chains Are Invisible

In design:

• All inter-state supplies, even B2C, were to be tracked and taxed under IGST.

In delivery:

• B2C transactions (without GSTIN of recipient) don’t allow for destination tagging.
• Kerala cannot claim its rightful share without recipient-side verification.
• Informal sector imports, courier deliveries, and e-commerce orders often bypass the GST trail.

5. States Have No Power to Fix Errors

In design:

• States and Centre were supposed to function as equal partners.

In delivery:

• Kerala cannot directly audit or take action against a supplier in Maharashtra or Gujarat who misclassifies a Kerala-bound supply.
• Enforcement power, generally, is geographically limited, undermining the destination principle.

The Consequences of this Gap for Kerala

The design promised equity, transparency, and reward for consumption. But the delivery leads to erosion of state revenue.

Kerala suffers in multiple ways:

Under India’s dual GST system:

• CGST and SGST are levied on intra-state supplies.
• IGST is levied on inter-state supplies, collected by the Centre, and is supposed to be apportioned between the Centre and the destination state.

The intent is simple: “Tax should follow the consumer.”

Yet, Kerala’s fiscal experience suggests the opposite. Let’s dissect why.

Why Kerala’s IGST Share Is Low Despite Heavy Consumption

1. Invoice Mismatch and Wrong GSTIN Reporting by Suppliers

IGST relies on correctly tagged destination-state details in GSTR-1 (filed by suppliers).

Problem:

• Suppliers in other states (say, Tamil Nadu or Karnataka) often fail to mention the correct GSTIN of the Kerala buyer.
• They might leave it blank (in B2C cases), wrongly enter another state’s code, or bulk-upload invoices with incorrect defaults.

Result: The system fails to attribute the IGST to Kerala, even though goods physically arrive and are consumed there.

2. Cross-Utilisation of IGST Credit by Kerala Dealers

Dealers in Kerala who purchase goods inter-state pay IGST, but use it to offset their CGST and SGST liabilities via input tax credit (ITC).

Problem:

• IGST collected from inter-state suppliers is internally adjusted by the Central Government.
• This reduces the actual IGST cash apportionment to Kerala, even though the State has facilitated consumption.

3. Delay and Opaqueness in IGST Settlement by Centre

The IGST is held by the Centre until proper reconciliation of returns (GSTR-1 and GSTR-3B) is done.

Issues:

• Delays in data processing and inter-agency reconciliation.
• Lack of transparency in how much IGST has been apportioned or is pending.
• No real-time sharing of granular IGST settlement data with states.

4. Non-Filing by End-Users: Consumers, Institutions, and PSUs

A critical but under-recognised issue.

A large share of inter-state supplies to Kerala is consumed by:

• Individual consumers (B2C),
• Government institutions,
• Colleges and universities,
• Public Sector Undertakings,
• Scientific bodies like VSSC, ISRO units, and autonomous R&D organisations.

Problem:

• These entities either:
  • Don’t have GSTINs, or
  • Don’t file returns, or
  • Claim exemption (being non-commercial entities).

As a result:

• No recipient-side validation occurs.
• Matching of returns fails.
• The Centre retains the IGST, as there’s no mapped destination-state recipient in the GST system.

Even when such institutions have GSTINs, they do not claim input tax credit as they’re not output taxpayers. Hence, the trail of tax ends at the Centre, leaving Kerala out of the IGST loop.

This is especially significant in Kerala where:

• A high proportion of consumption is by non-commercial buyers (households, hospitals, educational institutions).
• Major importers like VSSC, ISRO, and large private hospitals often don’t feed IGST back to the state system.

5. Leakages via E-Commerce and Informal Channels

With the surge in e-commerce, goods enter Kerala through:

• Online platforms,
• Third-party logistics,
• Courier and transport operators.

Issues:

• GST may be paid as IGST, but place-of-supply may be misclassified (especially if buyer’s address or PIN code is not correctly updated).
• Sellers in unorganised sectors often underinvoice or evade tax.

6. Structural Weakness: Lack of Enforcement Powers for States

State GST officers have limited power to audit or question suppliers in other states. So if a supplier in Maharashtra underreports or misfiles a sale to Kerala, Kerala has no jurisdiction to act, unless it triggers a national-level audit.

Illustrative Example: Supply to a Non-Registered College in Kerala

• A Delhi-based lab equipment supplier sells ?10 lakh worth of microscopes to a Kerala-based government college.
• IGST of ?1.8 lakh is charged and paid to the Centre.
• The college is not registered under GST (no output supply).
• Since the buyer doesn’t file any return, no matching occurs in the GSTN system.
• Hence, IGST is never credited to Kerala, though the equipment is consumed entirely in the state.

Revenue Loss and Fiscal Consequences

• Kerala loses substantial tax revenue, which should have rightly accrued under the destination-based principle.
• This widening gap affects Kerala’s ability to:
  • Invest in infrastructure and public services,
  • Maintain fiscal discipline without borrowing,
  • Fund centrally sponsored schemes that require state co-financing

What Kerala is Demanding

1. Real-time IGST flow visibility for the state GST departments.
2. Amendment in IGST settlement rules to ensure:
   • B2C and institution-based consumption are adequately captured.
   • Non-filer end-users don’t cause revenue loss to destination states.
3. Centralised auto-verification system for large-value transactions to unregistered recipients.
4. Periodic audit of IGST settlement by CAG, shared with States.
5. Enhanced rights for States to audit and question suppliers affecting their IGST share.

The Way Forward: Reforms Required

Conclusion

Kerala’s case is a cautionary tale that highlights the implementation gap in India’s GST system. A regime designed to reward consumption states ends up penalising them due to:

• Data gaps,
• Institutional non-compliance,
• Lack of state-level enforcement reach, and
• Structural opacity in IGST flow.

If GST is to retain its promise of “One Nation, One Tax,” it must also honour its destination-based ethos with matching fiscal outcomes. For Kerala and similar states, justice in taxation begins with transparency, accountability, and reform in IGST settlement.

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By JayaprakashGopinathan

Advocate