GST collections: signifying economic resilience!

What’s the Point? (A Brief Summary)

India reported gross GST collections at Rs 1.72 Lakh crore for the month of Oct’23, an increase of 13.4% over the last year. Six years since its introduction, the GST system has resulted in increased tax buoyancy, eased logistics, better tax administration, increased formalisation, among others. Persistent improvement in tax collections bodes well for the fiscal position, and indicates economic resilience along with greater formalisation in the economy in an environment of global macroeconomic and geopolitical concerns.

GST collections trend – recent and over the past 6 years

Gross GST collections for the fiscal year so far have been at the rate of Rs 1.66 Lakh crore, which is 11.4% higher than Rs 1.49 Lakh crore between Apr-October last year. Growth has moderated vs the past 2 years, which showed recovery from the Covid-19 pandemic shock. In fact, overall GST growth has clocked a CAGR of ~11% over FY19, higher than the nominal GDP growth seen in the period of about ~9.5% (which had the Covid-19 pandemic impact). Since tax rates have not seen any meaningful increase during the period, it signifies the growing level of formalisation into the economy.

Source: PIB, CMIE. *FY18 had limited data as GST was effective July 2017

Pre-GST, India had several indirect taxes, which posed a challenge in the tax administration. Hence, the Government wanted to unify and centralize the tax on both goods and services in order to reduce the compliance burden on taxpayers and ease the tax administration.

By launching GST, the Government envisioned to achieve the objective of “One Nation, One Tax”. Implementation of GST has helped in formalization of the economy and increase transparency as the ecosystem disincentivizes entities that are outside the tax net. The GST Council that governs and implements the GST is a unique federal structure.

Reasons behind the success of GST in improving tax compliance and incentivising formalisation

• Use of Newer Technologies: The extensive use of technology and reporting requirements under GST have resulted in higher tax compliance, while also widening the overall tax base. There has also been work on the integration of newer technological tools using Data analytics, Artificial Intelligence, and use of technologies like Radio-Frequency Identification (RFID) Tags along with the e-way bill system.
• Tackling Fake GST Invoices: A reason that has led to the rise in revenues has been the actions against fake GST invoices being raised. It was decided that a regime would be put in place to enable the identification of suspected entities at the initial stage itself, and in other cases, the detection of GST frauds at the earliest. One of the key reasons behind higher tax collections in October 2023 are seemingly the high number of notices, anti-evasion drives and investigations by the tax administration.
• Other reasons: the GST Council has continuously assessed data and corrected for inverted structures and tax loopholes. With standardised rates, businesses find it more beneficial to join the tax net.
   

Strong e-way bill data indicating robust economic activity

Increase in number of GST-registered entities and higher compliance to GST returns

Source: GSTN, CEIC

Persistent efforts to improve the GST system via reforms has helped in increasing the number of GST assessees, and also improved the tax filing rates.

Conclusion

Over the last few years, GST has evolved in terms of policy, tax rates, and procedural and technological overhauls. Persistent efforts to curb tax leakage in the system have borne fruits, and bode well for the economy.

Despite global headwinds, India’s growth has shown remarkable resilience with high frequency indicators largely growing at steady pace. GST collections should also therefore continue to be robust. The collective will to tackle challenges in the system in a federal manner bode well for the structural resilience of the economy.

Sources: GST Council, CMIE and other publicly available information

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