The unsung hero – After five years, it seems GST has begun to show sustained growth even as it has many weaknesses and policy challenges

Source: The post is based on an article “The unsung hero – After five years, it seems GST has begun to show sustained growth even as it has many weaknesses and policy challenges” published in Business Standard on 24^th May 2023.

Syllabus: GS 3 – Indian Economy – Fiscal Policy, Growth and Development

Relevance: problems with the different tax collection.

News: The article highlights the different trend in the tax collection rate in India.

What has been the trend in the tax collection post-Covid?

Direct Tax: Direct Tax bounced back with a growth rate of 49 percent in 2021-22 and again with 18 per cent in 2022-23 after suffering a decline of almost 10 percent in 2020-21.

GST: Growth in GST collection in 2019-20 was 4 percent but collection fell by 7 percent in the first Covid year of 2020-21. However, the growth rate increased to 31 percent in 2021-22 and 22 percent in 2022-23.

How has the GST collection been compared to the Direct Taxes?

The recovery in GST collection has been better than the increase seen in direct taxes.

In 2018-19, direct taxes accounted for 6.01 percent of GDP. In 2021-22, this share was still below the pre-Covid level at about 6 percent and moved up marginally to 6.11 per cent in 2022-23.

Why hasn’t direct tax collection done well?

Corporation tax collection has fared. Its growth was at 41 percent in 2022-23. However, personal income tax, which did well in 2021-22 (43 percent up), saw a decline of about 6 percent in the next year.

This was the major cause for direct tax collection to perform poorly compared to the GST.

Why has there been an increase in the collection of corporation tax compared to the personal income tax?

Since 2015, corporation tax rates have been steadily reduced almost every year, and these reductions are related to the phase-out of exemptions. In 2019, the reduction was significant for new companies as well.

Companies have also bounced back with higher profits immediately after the end of Covid. These all have led to the healthy rate of corporation tax collection.

What does the recent trend in personal income-tax collection imply?

Personal income-tax collection has been a cause for concern for the finance ministry.

In 2020-21, the ministry tried to introduce an alternative exemption-free taxation regime to widen the tax base and improve collection. However, due to various problems, the scheme hasn’t been effective.

Further, the recent attempts of the finance ministry to levy a 20 percent TCS could be seen as a mechanism to boost its personal income-tax collection. However, such an attempt is a sign of short-sighted taxation policy.

What has caused the improvement in the collection of GST?

1. a) e-invoicing and procedural simplification, b) better compliance procedures, c) the rising inflation rate and d) the rise in import duties, have all made GST collection higher.

GST collection also saw the tax’s share in GDP going up. The share of GST in GDP was 6.22 percent in 2018-19. After this share fell in the Covid period, it once again rose to 6.65 percent in 2022-23.

What are the challenges with GST collection?

1. a) too many rate slabs persist with no moderation in the rates of several items, b) the exclusion of petrol and diesel from the GST ambit, c) the phase-out of the compensation cess is also unresolved.

Hence, the current phase of healthy GST growth could be an opportunity for the government to address the long-pending problems with the GST.