Can growth in GST collections move into double-digits?

Every time the monthly GST collections cross ₹1-lakh crore, there is cheer all around. But do you know that the ₹1-lakh crore number was first crossed in April 2018, when monthly collections were ₹1,03,459 crore. The highest collection was recorded in April 2019 at ₹1,13,865 crore. The ₹1-lakh crore number is thus 12 per cent below the peak number.

While the collections for October and November 2020 crossing the Rs 1 lakh crore mark is laudable given the blow to the economy due to the Covid-19 pandemic, a deep dive in to the collection trends in GST since inception shows that growth is actually stagnating.

This is largely due to the inherent sluggishness in indirect tax collections in the country. States’ own tax revenues have also been slower compared to the share of taxes devolved from the Centre. Unless the shortcomings in indirect tax system are plugged, making GST grow in double-digits could be next to impossible.

Trend in GST collections

The year 2017-18, when GST was rolled out, was marred by teething troubles involving return filing, leading to the Centre giving numerous concessions to taxpayers. In the first full year after the rollout ( FY19), the average monthly collections grew 9 per cent compared to the previous year. But with GDP growth skidding in FY20, GST collections also turned sluggish at 3.86 per cent that year. Average collections in FY21 are 18 per cent lower, largely due to the dip in April and May.

This lower growth poses problems on two counts. One, the budgeted collections from GST have been far higher, thus leading to higher fiscal deficit. Two, the States have been promised 14 per cent growth in GST collections in the first five years. This translates into expected collection of roughly ₹1,33,000 crore in FY21, even if FY18 is assumed as the base year. By this yardstick, the ₹1,00,000 crore is 25 per cent below the required sum.

Why the lower growth?

If we analyse the trend in tax revenue growth for the Centre, income tax collections have shown a steady growth between FY12 and FY20, clocking compounded annual average growth rate of 16.5 per cent. Despite the Centre lowering the IT rate for low-income groups, increase in surcharges and cess for high-income earners and gradual increase in tax base, appears to have helped. With the exception of FY15 and FY19, growth in income tax collection was in double-digits in all years; even in FY20 when economy was slowing. But corporate tax collections have been more closely linked to economic growth, de-growing 8 per cent in FY20 and with CAGR, that is just half the income tax revenue.

With the GST subsuming a large part of excise duty, customs duty and service tax from FY18, we looked at the growth trends between FY12 and FY17 for indirect taxes. The large jump in indirect tax revenue in this period was mainly due to the Centre increasing the excise duty on diesel and petrol many times since 2014, making the most on decline in international crude oil prices.

Service tax collections also grew strongly as a host of new services were brought into the ambit and the rates hiked. Customs duty collections recorded the slowest growth as rates on various items were rationalised prior to FY18. If the effect of the rate hikes and new items being taxed is excluded, growth in indirect taxes has not kept pace with the growth in nominal GDP. This suggests that the presence of a large unorganised sector and rampant tax evasion was a problem in indirect taxes even before the GST regime.

With the GST rates being fixed after much deliberation, the Centre now has little room to improve GST collections through rate hikes. Further, the Centre has lowered GST rates on a host of items in FY18 and FY19, due to the demands from various industries. Also, the threshold for registering for GST is higher compared to the prior sales tax and VAT regime, further hampering the GST revenue.

If we look at the revenue of the States, the compounded average growth in States’ own tax revenue between FY12 and FY20 was 11.60 per cent whereas the share of taxes devolved from the Centre grew at a healthier pace at 13.8 per cent. This shows that States have also not been successful in garnering a healthy growth in their indirect taxes.

Ways to address the issue

It is therefore obvious that there is an inherent problem with indirect tax collections in India that has been carried forward to the GST regime. This is due to the large unorganised sector that deals mainly in cash and, thus, does not generate any record of transactions. The nudge towards reducing cash transactions and adopting digital payment would be the first step towards boosting indirect taxes.

While the GST was originally designed to enable shift from the informal to formal sector due to inbuilt self-policing tools such as the Reverse Charge Mechanism, this has been put on the back-burner. Reinstating the RCM will lead to larger companies coaxing their suppliers to register under GST, thus increasing the tax base.

With the e-invoicing and the new simplified GST return, the system is finally moving towards the original design of auto-populated returns, which result in lesser leakages. Once the changes are implemented, growth in collections could improve. Addressing the deficiencies in the tax administration — ensuring sufficient manpower, training and effective organisation and risk-based compliance verification -- will also help.

Finally, while the reforms can help steady the GST collections, a massive jump is possible only when economic growth improves, which could be after 2021.

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