Understanding GST revenue performance

Source: This post has been created based on the article “Understanding GST revenue performance” published in “Business Standard” on 2nd January 2024.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Issues relating to mobilization of resources.

News: The article discusses the GST revenue performance, while suggesting reforms in the current GST regime to boost collections.

The Goods and Services Tax (GST) has been a major policy success of recent years. According to the author, it has stimulated the growth of a truly national market, replacing multiple distorting taxes with a single system.

A detailed article on GST can be read here.

What are the recent GST collection figures?

The GST collection figure reported for 2022-23 is Rs. 18.1 trillion, equivalent to 6.6% of GDP.

With refunds of Rs.1.8 trillion, the net GST revenues (both Centre and state, including the cess) amounted to Rs.16.1 trillion, or 5.9% of GDP.

This gap (between collections and revenue) has hovered around 0.6-0.7% of GDP.

What are the refunds granted on GST?

Since in the case of GST, taxes are paid on actual revenues, in most cases there is no need for refunds. However, there is one major exception.
In GST, exports are zero-rated, which means that exporters don’t pay taxes on their output but are entitled to refunds on the taxes they paid on their inputs. This constitutes the major chunk of refunds under the GST.

Note: Zero-rated items are different from exempt items. Exempt items are not taxed but are also not entitled to input tax credits.

According to the author, data suggests that the gap between collections and revenues reflects refunds paid to exporters to reimburse them for the Integrated GST (IGST) they paid. The author makes further inference that since exports often rely heavily on imported parts, a large share of refunds is to compensate exporters for the IGST paid on their imported inputs.

What does this imply?

The large amount of refunds has important implications for ascertaining the performance of GST.

As seen in the infographic, the GST collection data implies that the GST regime immediately overtook the pre-GST average , then dipped during the pandemic period, and once again surpassed the pre-GST regime in 2021-22.

However, as per GST revenue figures (GST collection minus the refunds), GST revenue overtook the pre-GST regime only in the current fiscal year.

Why did GST revenues decline?

This is due to two reasons:

1. Faster Export Refunds: Export refunds have become much smoother, quicker, and fuller with the GST than they were under the previous regime.
2. Rate Cuts: There were rate-cuts in the years leading up to the pandemic. This led to reduction of the weighted average collection rate from 14.4% in 2017 to 11.6% in 2019.

What needs to be done to further boost GST collections?

The real need is to address the remaining major design flaws. This includes:

1. Reversing Rate-Cuts: The rate cuts of 2018-2019 need to be reversed, even if not fully, as part of a rationalisation of the overall rate structure.
2. Simplification of the Rate Structure: The current complexity, especially for the cesses, is bringing down revenue collections and is complicating enforcement.
   For instance, moving to a three-rate structure (as per the Revenue Neutral Rate (RNR) Committee in 2015) with a standard rate of 18%, a lower rate of say 10%, and a demerit rate of 40%.
3. Incorporating GST Compensation Cess into the rate structure: This would simplify the system and eliminate the exclusion of revenues from the divisible pool of taxes.

Question for practice:

The Goods and Services Tax (GST) was heralded as one of the most significant indirect tax reforms since independence in India. Examine its performance after 6 years of its implementation. Suggest steps to tackle the challenge of lower revenues.