Structural shift
Higher GST collection reflects better compliance
Goods and services tax (GST) collection for April indicates a structural shift. Collection touched an all-time high of ~1.41 trillion in April against ~1.24 trillion in March. The GST mop-up has been in excess of ~1 trillion for seven months in a row. There could be multiple reasons for the jump witnessed in April. Since collection in April reflects transactions in March, it is likely that businesses deposited pending dues before the end of the fiscal year, which pushed up the total collection. It is also likely that economic recovery was gathering momentum, which led to higher activity and tax collection. Another reason — and perhaps the most important — could be significant improvement in compliance, which also explains higher tax collection over the last few months.
The government has taken a number of steps over time to contain leakages in the system. The Comptroller and Auditor General of India, for instance, found that the GST system was vulnerable to input tax credit fraud because of compliance complexity. The government has been working in this area. It is now closely monitoring fake billing and using data analytics from multiple sources to check evasion. The simplification of the filing process has also helped small taxpayers. Besides, the government introduced mandatory e-invoicing in a phased manner. From April 1, it’s applicable to all businesses with a turnover of ~50 crore and above. This will further improve compliance. Additionally, the pandemic has had a disproportionate impact on the unorganised sector. It is likely that business has moved to organised firms, which has improved the overall level of tax compliance in the system.
However, the increase in tax collection is unlikely to sustain in the near term. The surge in Covid-19 cases and lockdowns in different parts of the country are affecting both production and consumption. The generation of e-way bills, which is an important indicator of economic activity, has reportedly fallen to a five-month low in April. A significant dent in economic activity will affect GST collection. But things should again improve once the pandemic is under control. At a broader level, an improvement in tax collection is encouraging. Both the Central and state governments need higher revenues. The pandemic has significantly increased the general government debt and deficit. India’s public debt is estimated to have expanded to about 90 per cent of gross domestic product (GDP). Thus, in the given situation, a material improvement in the GST system could provide big relief.
Indirect tax collection suffered significantly after the implementation of GST. As the Fifteenth Finance Commission noted, the GST revenue (net of the compensation cess) was just about 5.1 per cent of GDP in 2019-20. However, the general government revenue from taxes included in GST was worth about 6.3 per cent of GDP in 2016-17. Compliance is one explanation for lower tax collection. The other factor is lower tax rates. A 2019 study by the Reserve Bank of India, for instance, showed that because of multiple rate adjustments, the effective weighted average rate for GST declined from 14.4 per cent at the time of implementation to 11.6 per cent. Now that the compliance part is showing visible improvement, the GST Council should look at rationalising rates. Improvement in GST collection will help ease the pressure on government finances and make economic recovery relatively smooth.