A GST roadmap

The November GST collections at ₹1.31-lakh crore are no doubt comforting; it shows that economic activity and consumption are returning to normalcy. The fact that the collections were 27 per cent higher than the GST revenue in November 2019 and the second-highest ever, is largely due to the Centre improving compliance through the use of data analytics to spot evasions and fake invoicing — and by acting stern with those filing late, erroneous or incomplete returns. Indirect tax collections typically tend to be sluggish in periods of tepid economic growth. The collection trends so far this fiscal indicate that revenues could turn robust, once the pandemic abates. That said, the GST system continues to be in a phase of transition; this is reflected in the sluggish annual growth in GST revenues since its implementation in July 2017. If the average monthly collections are analysed, GST revenue has grown at a compounded average growth rate of just 7 per cent between 2017-18 and 2021-22. While part of this slow growth is due to the economic slowdown in 2019-20 and 2020-21, the GST Council has also had to reduce rates on numerous goods and services and provide relaxations and exemptions to smaller businesses — in order to smoothen their transition and reduce pain points.

It is, therefore, not surprising that the GST fitment committee is deliberating over increasing revenues from this stream. The current weighted average GST rate of 11.6 per cent is far below the revenue neutral rate — which is the rate at which States can earn as much from GST, as from the taxes that were subsumed in GST. With the compensation cess collections falling short in recent years, the Centre has borrowed to pay the compensation dues to States. While the Centre is in a tight situation, raising the current GST slab rates of 5, 12, 18 and 28 per cent or moving some goods out of the exempted category would not be the right approach. In fact, rates and fitments should be rationalised to make compliance easier, while reducing both the scope and incentives for tax evasion. Going the other way will be inflationary — a common apprehension linked to GST globally — and this will hurt consumption at a time when it is vital to revive it. The GST Council should try to move towards a weighted average GST rate of below 10 per cent in the coming years.

The Council should not lose sight of the original intent of the GST system — to expand the tax net by bringing more entities from the informal sector into the formal sector. This will be possible if the tax slabs are rationalised. Return filing and compliance also need to be made more user-friendly, keeping smaller businesses in mind. While the recent hikes in rates for few sectors such as textiles and footwear were carried out with a view to addressing the inverted duty structure, a thorough overhaul of rates across sectors to address such anomalies will be welcome.

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