Are Indian GST revenues really as buoyant as they appear to be?
Nov 2, 2023
Summary
Average monthly GST collections have been exceeding pre-GST era revenue but that trend isn’t seen in the mop-up as a ratio of GDP, which is indicative of lower revenue buoyancy under GST. This calls for a rationalization of GST slabs.
India’s gross goods and services tax (GGST) revenue hit ₹1.72 trillion in October, the second-highest since the rollout of this indirect tax regime. The average monthly GGST collection during the first half of 2023-24 has been ₹1.65 trillion, which has become a new benchmark. This monthly revenue figure has been tracked in recent years as an indicator of economic growth.
The GST regime was rolled out in July 2017 with the aim of replacing multiple indirect taxes levied by the central and state governments, eliminating the cascading effects of taxation to help lower the tax burden on consumers, while also ensuring uniformity in the tax structure across India. A lot of water has flown since. GST has meant greater tax buoyancy for both the Centre and states, enabling the Centre’s ambitious infrastructure programme and pursuit of fiscal consolidation.
Barring the pandemic years, the average monthly GGST mop-up has been on an uptrend. It surged from ₹0.90 trillion in 2017-18 to ₹0.98 trillion in 2018-19 and ₹1.02 trillion in 2019-20. In 2020-21, it dropped to ₹0.95 trillion but rebounded as soon as the pandemic subsided and the economy regained momentum; the average monthly intake surged to ₹1.24 trillion in 2021-22 and then to ₹1.51 trillion in 2022-23.
Revenue buoyancy: The government claims that the GST regime has been exemplary. Finance Minister Nirmala Sitharaman has said that it has reduced the tax burden on consumers and increased revenue buoyancy for states and the Centre. Notably, in the first half of 2023-24, the government realized GGST of ₹9.93 trillion, which is 11.20% more than a year earlier. It is expected that this buoyancy in collections will continue through the rest of the year.
Any tax system can be assessed through tax buoyancy. According to the International Monetary Fund, the buoyancy of a tax system measures the total response of tax revenue to a change in national income and discretionary changes in tax policy over time.
Sitharaman has said that the revenue buoyancy of states has increased significantly from 0.72 in the pre-GST era to 1.22 after its rollout. In the pre-GST regime, there was low tax buoyancy, as the tax revenue growth of states was slower than growth in gross domestic product (GDP). At that time, tax revenue growth was 8.3% while GDP growth was 11.5%. On the other hand, under the GST regime, tax growth was 12.3% while GDP growth was 9.8%. So the tax revenue of states has been growing faster than GDP.
Central GST: From 2017-18 to 2022-23, the average collection per year of CGST was ₹6.20 trillion against the budget estimate average of ₹7.02 trillion and revised estimate average of ₹6.24 trillion. The Centre, according to the Controller General of Accounts, has mobilized ₹4.67 trillion during April-September in 2023-24. This is 48.8% of the year’s budget estimate of ₹9.57 trillion ( ₹8.12 trillion CGST and ₹1.45 trillion cess). The government is confident it will surpass its budget estimate.
Challenges and way forward: From 2017-18 to 2022-23, while CGST collections grew 15%, GGST grew 11.7%. This means that GST growth of states would have been less than the growth in CGST. The Centre achieved its budget estimate only twice (in 2021-22 and 2022-23); however, the revised estimate was achieved thrice (2017-18, 2020-21 and 2021-22).
On the other hand, though GST is buoyant, there is a significant difference in pre-GST and GST regime revenue when stacked against GDP. Revenue from taxes subsumed under GST as a proportion of GDP in 2016-17 was 6.68%. In 2021-22, that ratio was 6.33%. Revenue collection improved slightly in 2022-23, with the ratio rising to 6.63%.
The government is losing revenue, as the revenue neutral rate (RNR) has been compromised by multiple changes in tax slabs. The Arvind Subramanian committee had recommended an RNR of 15-15.5% under GST. However, the weighted average GST rate has declined to 11.4%. According to economist Bibek Debroy, this rate must be at least 17%.
So, it can be said that even after buoyancy in GST revenue, the mop-up as a proportion of GDP in the pre-GST era was more than that in the GST era.
Thus, the government should go for a rationalization of the regime’s tax slabs. Instead of five rates, there should be a three-rate structure, as we had seen earlier in the case of Central Value Added Tax (merit, standard and demerit rate) to achieve a GST-to-GDP ratio of 7% over the medium term, as mentioned in the 15th Finance Commission’s report as an estimate of the potential.
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