The 47th meeting of the Goods and Services Tax (GST) Council which will begin in Chandigarh today almost coincides with the fifth anniversary of the roll-out of India’s biggest indirect tax reform. The five-year milestone is a crucial one for GST because it will mark the end of guaranteed revenues to states from the centre. In order to make states to agree to give up their fiscal sovereignty – in the post-GST framework, state governments are only left with indirect tax autonomy on stamp duties and excise revenues from fuel and liquor – the centre guaranteed to provide 14% growth over 2017 revenues to the states for the first five years of the GST period. With the guaranteed compensation period having ending on June 30, states are likely to demand an extension of this period.
To be sure, conflicting demands over compensation are not the only issue worth looking at as far as GST is concerned. Here are four charts which explain this in detail.
Monthly data suggests that GST revenues have finally turned a corner
When GST was rolled out, monthly collections of ₹1,00,000 crore were unofficially set as the benchmark of healthy revenue collections. It took until April 2018 for the monthly GST collection to cross this benchmark for the first time. It was only between March 2019 and May 2019 that monthly GST collections were higher than the ₹1,00,000 crore for three consecutive months. This feat would be achieved once again for four consecutive months from November 2019 onwards before the pandemic disrupted economic activity and tax collections. GST collections seem to have finally turned the corner from October 2020 onwards – collections have been higher than the ₹1,00,000 crore mark for every month since then – and from January 2022 onwards, they have continuously been higher than ₹1,30,000 crore.
See Chart 1: Monthly GST collections
But economists caution against reading too much into rise in nominal GST collections
Is the recent surge in monthly GST collections to be celebrated as an unambiguous sign of improvement in both the tax’s performance and state of the economy? Economists warn against drawing such conclusions. For example, a research note dated June 24 by HSBC Chief India Economist Pranjul Bhandari points that when seen as a share of GDP, GST numbers do not really suggest a big improvement in collections. “As for GST revenue, true that it has risen recently in INR terms. But, once we scale it with GDP, the rise is not dramatic. It has just about crossed pre-pandemic levels. And the counterfactual is that, if the informal sector had not been as disrupted, perhaps cash-based activities would have been lower, and GST revenue would have been even higher”, the note says.
See Chart 2: GST revenue as share of GDP
The other GST conundrum: states’ compensation
If GST revenues are not rising as fast as the nominal numbers suggest — as has been shown above – it also means that the anxiety about states losing their guaranteed revenue compensation window is only going to be greater. To be sure, not all states are going to be affected in the same manner when the GST compensation window comes to an end. A research note dated April 18 by SBI Chief Economist Soumya Kanti Ghosh shows this differential impact clearly. The share of GST compensation in total revenue of states varied from as low as 4% in the case of Haryana to more than 20% for states such as Bihar and Karnataka.
See Chart 3: GST compensation as share of state revenues
If not compensation, then rate-hikes (and more inflation)?
Thanks to the assured compensation clause in GST until June, incentives were skewed in the GST Council. Because states were assured of a 14% growth in revenues, there was not much incentive for them to push for or even agree to proposals of rate hikes in the council. An analysis of average weighted rates under GST shows that these have fallen continuously since the tax-reform was rolled out.
This is likely to change going forward as states will now have significantly higher stakes in boosting GST revenue collections. A shift towards such as consensus could be a healthy development as far as evolution of GST is concerned. However, the timing of such a transition is far from perfect. The Indian economy is still dealing with serious inflationary pressures, and GST rate hikes will only add to these. It also needs to be kept in mind that any inflationary tailwinds due to rate hikes could be a double whammy as the inflationary impact of GST compensation cess will continue – the proceeds will go towards repayments of loans for providing compensation to states – to generate price pressures.
See Chart 4: Weighted average effective GST rate