Indore (Madhya Pradesh): India's GST 2.0, announced in August 2025 and ratified in September, is more than a rate rationalisation. It replaces the litigation-prone 12% and 28% slabs with a cleaner three-tier structure: 5% for essentials, 18% standard, and 40% for luxury goods. This reform is pivotal for Madhya Pradesh's fiscal evolution, linking the state's story to the national reform.
MP has ben a foremost beneficiary of GST' implementation. As a predominantly consuming state, it consistently receives more from the IGST settlement pool than it contributes. In FY 2024-25, MP's pre-settlement SGST of Rs 14,031 crore led to post-settlement receipts of Rs 36,488 crore—a fiscal amplification of 2.6 times.
This is because Integrated GST (IGST), collected on inter-state transactions, is settled to the state where consumption occurs, not where production happens. With 8.5 crore consumers, MP captures tax revenues generated far beyond its borders, contrasting sharply with industrialized states (Maharashtra, Karnataka, Tamil Nadu) that contribute more than they receive, resulting in smaller amplification ratios.
GST 2.0 reinforces this advantage via two channels. First, the phase-out of the compensation cess by December 2025 redirects revenue into regular GST. Second, the new 40% demerit rate on luxury goods expands the IGST pool available for inter-state settlement, as premium goods travel through formal supply chains. Given that FY 2024-25 gross collections reached Rs 22.09 lakh crore (9.4% growth), with IGST at Rs 11.25 lakh crore, any expansion of this pool means larger settlement inflows for consuming states like MP.
However, the more consequential story involves a seemingly unfavorable trend: IGST's share of total GST collections is structurally declining, from 55.1% in FY 2017-18 to 51 per cent by FY 2024-25, while domestic SGST grew 10% year-on-year. While this might alarm a consuming state, the reality is the opposite. This declining IGST share is an advance, signaling that local production is rising and the state is generating revenues it no longer needs to claim from elsewhere. This transition indicates that Madhya Pradesh is moving from being a purely destination-based tax recipient to a more robust internal economy.
This compositional shift is driven by the deepening formalisation of India's domestic economy. As more businesses register locally under GST, more transactions are captured within state boundaries through SGST rather than flowing across state lines as IGST. For Madhya Pradesh, local enterprises formalizing and scaling generates own-source SGST that stays within its borders, lessening reliance on settlement. MP's pre-settlement SGST grew 7%, from Rs 13,072 crore (FY 2023-24) to Rs 14,031 crore (FY 2024-25). This growth, evidenced by contributions from manufacturers in Indore, Pithampur, Dewas, and Mandideep, is the best evidence that MP's production economy is taking root.
"A declining IGST share in MP's revenue mix is not retreat — it is advance. It signals that local production is rising and the state is generating revenues it no longer needs to claim from elsewhere."
GST 2.0 accelerates this shift by removing the compliance friction that constrains smaller enterprises. The abolished 12% slab accounted for 43% of all GST classification disputes despite covering only 18% of items, imposing estimated compliance costs of Rs 8,000–Rs 10,000 crore annually across India. These disputes were disproportionately concentrated at inter-state supply boundaries, making IGST the most volatile component of GST. Simpler rates mean more predictable inter-state commerce, lowering the barrier for MP's emerging manufacturers to participate in national supply chains—the participation that drives the structural shift from consumption-led to production-led growth. The macroeconomic case is equally clear: empirical analysis shows every one percentage point increase in GST revenue growth links to a 0.267 percentage point increase in GDP growth, meaning rate simplification generates measurable growth externalities.
The strategic reading for MP's planners is clear. The IGST fiscal windfall—real, substantial, and confirmed by FY 2024-25 data—should be leveraged to build the productive infrastructure that will eventually make such windfalls unnecessary: industrial corridors, logistics nodes, skill centres, and MSME clusters that deepen the state's manufacturing base. This investment will, over time, gradually compress MP's gainer margin in IGST settlement, but replace it with something more durable—own-source revenue from a diversified economy. When that transition is complete, MP's declining IGST share will no longer be a subject of analysis, but simply the signature of a state that graduated. GST 2.0 gives MP the fiscal headroom and structural environment to make that transition on its own terms.
{Article by Prof. Ganesh Kawadia}
The writer is a distinguished economist and former Head of School of Economics at Devi Ahilya University (DAVV), Indore. An expert in fiscal policy and regional equity, he has published extensive research on Madhya Pradesh’s economic growth, tax mobilization, and fiscal consolidation
