In the wake of a challenging economic climate, Finance Minister Nirmala Sitharaman emphasized the positive impact of the Goods and Services Tax (GST) regime, asserting its significant improvement in the system, ultimately benefiting both states and the people.
Despite debates on the current weighted average tax rate under GST, which is lower than the revenue neutral rate of 15%, leading to lower tax collections and affecting state revenues, experts highlight the sustained buoyancy in GST mop-up. This, coupled with an expanding tax base and reduced compliance costs, has supported both Centre and states’ revenue collections, providing a buffer against fiscal challenges.
Looking ahead, a potential review of GST slabs, focusing on simplification, is anticipated post the Lok Sabha elections. Analysts suggest that any restructuring should prioritize expanding the tax base and improving tax credit flows rather than wholesale rate hikes that might impact consumption adversely. The review may also involve pruning the list of items exempt from tax.
An RBI study in 2022 revealed a decrease in the weighted average GST rate from 14.4% at inception to 11.6% in 2019, attributed to a series of tax cuts. Despite challenges, gross GST collections have recorded a 12% year-on-year growth in the first eight months of the current fiscal year.
Components of gross collections indicate a significant jump in Central GST (CGST) and State GST (SGST) collections, while Integrated GST (IGST) collections show a softer increase. Cess collections have recorded a 12.9% rise in April-November, constituting a part of the gross GST mop-up and aimed at compensating states for revenue loss due to GST implementation.
The sluggish growth in imports has directly impacted IGST collections. Even with the removal of cess collections from the total GST mop-up, the growth trajectory remains similar, indicating that compensation cess removal may not alter the GST mop-up dynamics significantly.
Experts attribute the buoyancy in tax collections to economic growth, increased compliance, and various government initiatives. GST collections have seen substantial growth, reflecting a shift from Rs 80,000 crore to Rs 1.7 trillion in the current year. Improvements in compliance, e-invoicing requirements, and increased purchasing power have played pivotal roles.
Recent measures to enhance tax compliance include e-way bill-ITC matching, e-invoicing, AI and ML-based analytics, aadhaar authentication, and increased scrutiny through audits. The Directorate General of GST Intelligence (DGGI) detected Rs 1.36 trillion as overall GST evasion till October in the current fiscal, with a recovery of Rs 14,108 crore.
Looking ahead, the pace of GST collections may be impacted by a potential slowdown in nominal GDP growth amidst external uncertainties and tepid domestic demand conditions. However, sustained growth in GST collections, driven by compliance measures and audits, may mitigate the proportional impact of economic challenges. The consideration of GST rate rationalization is also under discussion, adding another layer of complexity to future GST dynamics.