Making sense of the GST bonanza

News: 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.

What are the reasons behind an inc in the GST 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. Thus there is a price effect. However, even after taking 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.

Third, in order to improve compliance levels, the GST Council has been modifying 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 off tax obligations.

– 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. From April, this process has been extended to firms above Rs 20 crore.

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 is also in line with data that shows a rise in GST registrations, filings and tax paid per registration.

Way forward

Considering that some of the drivers discussed above are unlikely to sustain at current levels, tax rates will need to be raised to fulfil expectations of higher collections. However, this requires careful consideration.

Lower compliance levels and greater exemptions require higher rates to garner the same level of revenues. Hence, compliance must be improved.

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.

Source: This post is based on the article “Making sense of the GST bonanza” published in The Indian Express on 27th May 22.