There has been a remarkable upswing in GST collections in recent months. In fact, collections touched a record high of Rs 1.67 lakh crore in April. But the critical question is: Will GST revenues stabilise at a higher level or will the surge peter out? Equally pressing, what additional steps need to be taken to ensure that the indirect tax regime delivers upon its earlier promise of enhancing government revenues — a source of stress between the Centre and the states.
There are several possible explanations for this jump in collections. First, the sharp rise in inflation has played a significant role. After all, as output turnover increases, taxes paid per filing will automatically increase. And notwithstanding concerns over the unevenness of the economic recovery, in nominal terms, the economy grew by 19.4 per cent in 2021-22 as per the second advance estimates.
Thus there is a price effect. To tease it out there is a need to deflate GST collections. Doing so suggests that a large part of the recent increase in collections is driven by rising prices. However, even after stripping away the price effect, collections have grown at a pace faster than GDP, indicating an increase in buoyancy.
Second, part of the overall increase in collections can be traced to higher imports. But even if one is to exclude the revenue accruing from imports, the rise in GST collections has outstripped GDP growth, indicating higher buoyancy.
To what degree these drivers moderate over time is not clear. However, to the extent that these factors — high domestic and global inflation, and an increase in demand for high-end imported products — persist at current levels, their impact will continue to be visible in GST collections.
Third, in order to improve compliance levels, the GST Council has been tweaking the rules to tighten the system. This can be observed at multiple levels.
Earlier, filers could get away without submitting returns for a few months. But the screws have now been tightened. As a consequence, returns filed have gone up, while the number of non-filers and those who delay filing have fallen. Alongside, the administration has also taken steps to tackle the menace of fake invoices by placing restrictions on the quantum of input tax credit that can be used to pay of tax obligations. But going by recent reports on the continuing detection of fake input credit scams involving huge sums of money, there remains considerable scope for improvement.
The introduction of e-invoicing has also played a role. Until recently, this was being implemented for firms with a turnover of more than Rs 50 crore. There are around 91,500 such firms (or 1.1 per cent of GST registered firms) which account for around 38 per cent of all B2B invoices reported in GSTR1, 66 per cent of B2B supplies, and 72 per cent of the tax paid. From April, this process has been extended to firms above Rs 20 crore.
While extending e-invoicing to the remaining firms will tighten the system, the incremental gains from bringing smaller firms into its ambit, while consequential, are unlikely to be of the same order. After all, firms with an annual turnover of Rs 25-50 crore account for just around 6 per cent of B2B transactions and invoices, while those with a turnover of Rs 10-25 crore account for roughly 10.1 per cent of B2B invoices and 7.1 per cent of B2B supplies. The real challenge lies in improving compliance levels across the entire spectrum of industries where inputs/raw materials are sourced largely from the informal sector.
Fourth, some part of the revenue gains are likely to have accrued due to the changing structure of the economy. The formalisation of firms, the growing concentration of economic power in the hands of a few, imply that for the same level of output, the tax paid will be higher. This explanation also sits well with data that shows a rise in GST registrations, filings and tax paid per registration. However, to the extent that the informal sector claws back its share, this effect may moderate.
Thus, considering that some of these drivers are unlikely to sustain at current levels, tax rates will need to be raised to fulfil expectations of higher collections. But this requires careful consideration.
Around two-fifths of the taxable value (or turnover) falls under the 18 per cent slab as per research by some analysts. In comparison, the share of the taxable value under the 12 per cent slab is considerably lower. This implies that simply merging the 12 per cent and the 18 per cent slab as some have been suggesting would lead to a revenue loss. If the Council does indeed merge these two tax slabs it will have to raise the other tax slabs just to protect the current level of revenues.
But, before opting for such adjustments, the GST Council must first ascertain the potential revenue (net of cess and refunds) at varying levels of compliance, tax rates and exemptions afforded. After all, these have a bearing — lower compliance levels and greater exemptions will obviously require higher rates to garner the same level of revenues.
Now, as per some estimates presented to the 15th Finance Commission, with existing exemptions in place, the current tax regime should ideally yield revenues equivalent to 8.23 per cent of GDP. If, however, only exemptions for food are kept in place, then collections should rise to 8.57 per cent of GDP. In another scenario, even if existing exemptions are kept in place, and if a single rate of 14 per cent is levied, then collections should rise to 8.93 per cent. At a 16 per cent rate, they would rise further to 10.20 per cent. Understandably, these calculations are based on certain assumptions which are debatable. However, crucially, all these scenarios assume full compliance. In reality, though, the compliance level was estimated to only 70 per cent.
Considering the current economic situation, now may not be an opportune moment to raise taxes. But there is no getting around it. Both the Centre and the states need to work towards this.
This column first appeared in the print edition on May 27, 2022, under the title ‘Making sense of the GST Bonanza’. Write to the author at ishan.bakshi@expressindia.com
