A former taxman explains what it will take to sustain the GST boom

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The financial year 2024-25 has started with a bang. The revenue from the Goods and Services Tax (GST) for the month of April 2024 hit a phenomenal ₹2.10 lakh crore. Central Goods and Services Tax (CGST) accounted for ₹43,846 crore, State Goods & Services Tax  (SGST) accounted for ₹54,538 crore , Integrated Goods and Services Tax ( IGST) accounted for ₹99,623 crore including ₹37,826 crore from imported goods and ₹13,260 crore was collected from cess.

This is a significant jump above the revenue of the previous month, March 2024, the last month of the last financial year when GST revenue touched ₹1.78 lakh crore. So, what is it which is driving GST revenue?

Fast Growing Economy

The Indian economy is on a roll. It is the world’s fastest growing big country. The annual growth is in the range of 6%-7%. It is the fifth largest economy and well on the way to becoming the third largest. The stock market is growing and is estimated to be the fourth-most valuable. Indian business is certainly doing well. The total assets under management in the mutual fund industry is at a high of about ₹54 lakh crore — an indicator of investor confidence.

FMCG industry witnessed a 6.4% rise in sales volumes — both urban and rural demand doing well. FMCG sales growth in non-food category outpaced growth in food indicating improving demand in discretionary items.

India’s retail inflation measured by consumer price index was around 4.85 percent well under the Reserve Bank of India’s tolerance band set between 2-6%. Since the GST rates are ad valorem strictly from the point of view of increase in revenue, inflation is not a bad thing.

As per CMIE, the private sector announced new investments which more than doubled sequentially to ₹11.4 lakh crore in the final quarter of financial year  2024. Investments were announced within manufacturing across the chemicals, machinery, and metals sectors. Public investment has been driving the investment climate-highlighted by the significant increase in investments in the roads and highways sector.

PMI Data

While the PMI manufacturing data for April is not available, March data had shown a surge to a 16-year peak of 59.1 driven by the strongest increases in output and new orders since October 2020 along with the second-largest increase in input inventories on record. The April PMI data will certainly be above 55. The services sector rebounded after a poor show in February. PMI services data for March (April data is not available at the time of writing) rose to 61.2 on the back of strong demand, improved efficiency, and sales.

The nudge given the robust and efficient GSTN system should not be overlooked. Adhering to the requirements of the GST law and procedure is increasingly becoming easier. Filing of returns is simpler — increased return filing has also meant improved analytics, and faster detection of non-filers.

The Directorate General of GST Intelligence (DGGI) has made optimum use of data analytics facilitating generation of technological driven intelligence inputs to detect record number of cases. The DGGI has detected 4872 cases involving evasion of ₹2,32,524 crore — ₹81,716 crore has been collected as voluntary payment. Arrests and launching of prosecutions have also seen a significant increase. All this has a massive persuasive and salutary effect on prospective evaders.

Challenges Ahead

Thus the very impressive GST revenue figures in April is a result of these multiple factors. However going forward there are several challenges looming. The Economist in a recent article suggested ‘three intertwined deficiencies’ —poverty and disparity resulting in not enough demand; lack of people in the workforce and the concentration of growth in some areas — and that these  would be impediments going forward in the country’s growth push . Though one can question the analysis, these certainly are issues which the  government is grappling with.

Merchandise exports have not been doing well. Our exports are still being led by the services sector — the problem of this is that they do not generate as much employment as the manufacturing sector does. Overall exports (merchandise + services ) is estimated to touch US$ 776.68 billion in FY 2023-24 as compared to US$ 776.40 billion in the previous fiscal. Still there is an overall trade deficit of about US$ 78.12 billion largely because of the poor show of merchandise exports. This is despite imports having come down by about 6%. Indian exporters continue to suffer from a  big cost disadvantage — logistics, high factory costs and lack of scale hurt them. Exports ultimately should be fuelling growth.

This has severely impacted creation of jobs. As per CMIE the employment rate (the percentage of labour force looking for a job ) has risen to 8% from 6.8%. A lot more focus is required on labour intensive sectors like textiles and the MSME sector. Far too much of the labour force is still in the agriculture and allied sectors sector — this is as high as 45.76% as per the Periodic Labour Force Survey. 

Tax to GDP Ratio

India’s tax to GDP ratio is poor. Direct tax to GDP ratio is said to have hit a 15 year high of 6.11% — this despite the fact that just 0.3%  pay 76% of income tax suggesting that the base needs to expand. With the ratio for indirect taxes being around 5%, the overall tax-to-GDP ratio is at about 11.11%. This needs to increase. A higher tax to GDP ratio means the country can spend a lot more on improving infrastructure, health, education — all critical for the country’s long-term growth. The latest report from the World Inequality Lab, based on hundred years of data from 1922 to 2023 has shown that income and wealth inequality to be the highest ever now. All these are areas of concern.   

GST revenue cannot do well only because of better administration and compliance. For it to continue to do well the overall economy has to do well. This will be the challenge going forward.

— The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.

Read his previous articles here 

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow