Modest growth in State’s Own Tax Revenue emerges as weak spot in T.N.’s economy

Tamil Nadu, which clocked 10.83% economic growth rate in real terms for 2025-26, has, however, registered only a modest growth rate with respect to the State’s Own Tax Revenue (SOTR). 

Based on unaudited provisional figures put out by the office of the Principal Accountant General (Accounts and Entitlements), Tamil Nadu, the growth rate worked out for SOTR in 2025-26 vis-à-vis 2024-25 was 6.8%. In absolute terms, the revenue went up to about ₹1.92 lakh crore from ₹1.80 lakh crore.

As for SOTR, there are two broad components – the State Goods and Services Tax (SGST) and Taxes on Sales & Trade. In respect of the SGST, the collections increased to ₹72,008.47 crore for 2025-26 from ₹70,886.77 crore for 2024-25, marking a rise of only 1.6%. For the previous year, the State government scaled down the collections of SGST to about ₹79,449 crore from ₹93,620 crore, following the rationalisation of GST rates.  

In fact, in February, then Finance Minister Thangam Thennarasu, in his interim Budget speech, observed that the GST rate rationalisation was approved by the GST Council without considering the apprehensions and opposition recorded by several States. He had anticipated a revenue shortfall of around ₹9,600 crore for 2025-26. 

As for the total revenue receipts, the figure rose to ₹2.91 lakh crore from ₹2.83 lakh crore, showing a rise of about 3%. During 2024-25 too, the rate of increase in SOTR did not reflect the economic growth rate. The State had recorded a double-digit economic growth of 11.19% but the growth rate of SOTR was only 7.74%. 

Ordinarily, higher economic growth rate paves the way for tax buoyancy. However, a veteran policymaker points out that there may not be much reflection on tax collections when economic growth is driven by exports or not broad-based. 

GST rationalisation

But in the case of Tamil Nadu, two reasons are attributed – rate rationalisation of the Goods and Services Tax which came into effect in September last year and the below-par compliance of the GST among traders. As for the first reason, an economist says that initially, States such as Tamil Nadu suffer erosion in tax revenue collections but, once consumption picks up, they will benefit.

As for the second, the compliance aspect was not given much importance because the State was keen on getting compensation. Due to a combination of factors, it was well known by 2022 – five years after the launch of the GST – that over 3.25 lakh, representing around 30% of the registered dealers, had not paid a single rupee towards the tax. Besides, about 1.94 lakh dealers had paid less than ₹1,000 in 2021-22 [as of February 28 this year, the strength of normal taxpayers was 11.4 lakh]. 

In the last four years, the authorities have not declared that the problem of poor tax compliance has been resolved once and for all, even though there have been reports of improved taxpayer compliance. Unless loopholes in this regard are plugged, there will not be much improvement in tax collection, the policymaker says. He also points to instances of “willful” hikes in assessment rates that were later rectified. Tackling this issue should be a top priority for the present government, he adds.