The record goods and service tax collections during April (mostly for March transactions) signal a robust economy. As the data reveals, the 12.4% year-on-year increase in collections to Rs 2.1 trillion has been driven by a decent 13.4% increase in domestic sales. Some part of the double-digit growth would surely have been the result of year-end adjustments by tax assesses, but the government’s estimates for FY24 would have been comfortably exceeded.
There is ample evidence that consumption demand for premium products and services has been strong. This is particularly true for sectors including automobiles, consumer durables, hotels and even food products. As such, it appears that spends on high-end products, which also attract a higher tax rate, are boosting the collections.
The strong mop-up can also be attributed to an increasing formalisation of the economy as the government steps up vigilance and streamlines processes compelling companies to become compliant. The government must be complimented for the administrative measures, especially efforts to spot fake invoicing and registrations, and also the initiatives taken to ensure companies file their returns.
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By addressing evasion, the tax base has also widened over the years. If GST collections have grown at a better or same pace as collections of other taxes, the efficiency of the tax authorities has certainly played a big role.
There are those who point out that the ratio of GST-gross domestic product (GDP) has not gone up much since the consumption-based levy was rolled out in July 2017. One reason for this has been the politically motivated cuts in the rates for certain products as well as the impact of the Covid pandemic.
The GST-GDP ratio was 6.3% in 2021-22, up from 5.7% in 2020-21, and went up further to 6.7% in 2022-23. Going by the second advance estimate for GDP, the ratio is estimated to come in at just under 7% for 2023-24. On balance therefore, given the major disruption from the pandemic, the trend is quite encouraging. Again, many have argued, the multiple rates need to be pruned. That may be the right thing to do to keep the construct of the tax simple.
However, the fact is that aggregate consumption in the economy has been growing at an anaemic pace — private final consumption expenditure (PFCE) grew at only 3.5% in Q3FY24 and at 2.4% in Q2FY24. There is evidence to suggest rural demand remains fragile — real wages have been stagnant for close to one and a half years now — and that sales of a range of essential goods are sluggish.
Raising the GST rates on essentials at a time when food inflation continues to remain high would, therefore, hurt the weaker sections. In fact, given how robust the collections are, it is more than evident that high tax rates are not a deterrent and affluent consumers are not hesitating to spend. Despite the continuation of the cess, sales are reasonably good.
As such, there is no case for either lowering rates or raising them just yet; the move to a three-tier structure and thereafter to a single rate of 12% or 14% can be considered later when the revival in consumption is more broad-based. Or perhaps in March 2026 when the cess will end. In the meantime the GST Council could consider bringing in more products in its ambit; petroleum, for instance, though states are unlikely to agree.
The record goods and service tax collections during April (mostly for March transactions) signal a robust economy. As the data reveals, the 12.4% year-on-year increase in collections to Rs 2.1 trillion has been driven by a decent 13.4% increase in domestic sales. Some part of the double-digit growth would surely have been the result of year-end adjustments by tax assesses, but the government’s estimates for FY24 would have been comfortably exceeded.
There is ample evidence that consumption demand for premium products and services has been strong. This is particularly true for sectors including automobiles, consumer durables, hotels and even food products. As such, it appears that spends on high-end products, which also attract a higher tax rate, are boosting the collections.
The strong mop-up can also be attributed to an increasing formalisation of the economy as the government steps up vigilance and streamlines processes compelling companies to become compliant. The government must be complimented for the administrative measures, especially efforts to spot fake invoicing and registrations, and also the initiatives taken to ensure companies file their returns.
By addressing evasion, the tax base has also widened over the years. If GST collections have grown at a better or same pace as collections of other taxes, the efficiency of the tax authorities has certainly played a big role.
There are those who point out that the ratio of GST-gross domestic product (GDP) has not gone up much since the consumption-based levy was rolled out in July 2017. One reason for this has been the politically motivated cuts in the rates for certain products as well as the impact of the Covid pandemic.
The GST-GDP ratio was 6.3% in 2021-22, up from 5.7% in 2020-21, and went up further to 6.7% in 2022-23. Going by the second advance estimate for GDP, the ratio is estimated to come in at just under 7% for 2023-24. On balance therefore, given the major disruption from the pandemic, the trend is quite encouraging. Again, many have argued, the multiple rates need to be pruned. That may be the right thing to do to keep the construct of the tax simple.
However, the fact is that aggregate consumption in the economy has been growing at an anaemic pace — private final consumption expenditure (PFCE) grew at only 3.5% in Q3FY24 and at 2.4% in Q2FY24. There is evidence to suggest rural demand remains fragile — real wages have been stagnant for close to one and a half years now — and that sales of a range of essential goods are sluggish.
Raising the GST rates on essentials at a time when food inflation continues to remain high would, therefore, hurt the weaker sections. In fact, given how robust the collections are, it is more than evident that high tax rates are not a deterrent and affluent consumers are not hesitating to spend. Despite the continuation of the cess, sales are reasonably good.
As such, there is no case for either lowering rates or raising them just yet; the move to a three-tier structure and thereafter to a single rate of 12% or 14% can be considered later when the revival in consumption is more broad-based. Or perhaps in March 2026 when the cess will end. In the meantime the GST Council could consider bringing in more products in its ambit; petroleum, for instance, though states are unlikely to agree.
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