Understanding GST Revenue Trends and Economic Impacts in India

Understanding GST Revenue Trends and Economic Impacts in India

The Government of India recently released the Goods and Services Tax (GST) revenue collection data for October. This data provides valuable insights into the performance of the GST system since its implementation.

Background of GST in India

The Goods and Services Tax (GST) regime was introduced in India in 2017, following the 122nd Constitutional Amendment Act of 2016. GST is a destination-based tax applied at every stage of the supply chain, taxing only the value added at each stage. An important feature of GST is the input tax credit, which allows businesses to claim credit for taxes paid in previous stages, ensuring that the final burden of tax is on the end consumer.

Revenue Trends Since GST Implementation

In October 2023, India’s GST collections reached ₹1.96 lakh crore, reflecting a 4.6% year-on-year increase, largely fueled by festive-season consumption. Economically advanced states like Maharashtra, Karnataka, Gujarat, Tamil Nadu, and Haryana contributed over 40% of the total GST revenue, showcasing their industrial and service sector strength. However, nearly 20 states and Union Territories reported a contraction in GST revenue collections, highlighting challenges in certain regions.

Despite the growth, GST revenues remain below pre-GST tax levels in relation to GDP, with the combined Centre-state tax share declining from 6.5% of GDP in 2015-16 to 5.5% in 2023-24. Similarly, the states’ average SGST-to-GDP ratio of 2.6% trails behind the pre-GST average of 2.8%. Notably, five northeastern states—Mizoram, Nagaland, Sikkim, Meghalaya, and Manipur—have improved their tax-to-GSDP ratios, whereas states like Punjab and Chhattisgarh have seen significant declines.

Positive Impacts of GST on the Indian Economy

• Improved Tax Buoyancy: GST has enhanced the tax buoyancy of India’s indirect taxation system to 1.22, compared to the pre-GST level of 0.72, thanks to a widened tax base and better compliance mechanisms.
• Broadened Tax Base: The implementation of GST has led to a significant expansion of the tax base, with more businesses registering under the system. Enhanced digital record-keeping has strengthened compliance.
• Boost to Formalisation: GST has accelerated the formalisation of businesses, requiring small traders and start-ups to register once they cross prescribed turnover limits, which increases transparency.
• Reduction in Logistical Costs: The Economic Survey 2023-24 reported a decrease in logistical costs following GST’s implementation, attributed to the elimination of interstate check posts and tax barriers.

Issues in the Current GST Framework

• Frequent Revision of Tax Slabs: Continuous changes by the GST Council create uncertainty, leading to confusion and compliance challenges for businesses.
• High Compliance Burden: Mandatory online filings and multiple return submissions place a significant operational burden on small and medium-sized enterprises.
• Exclusion of Key Goods: Major commodities like petroleum products, electricity, and alcohol are excluded from GST, which results in inefficiencies and increased costs for consumers.
• Non-functional GST Appellate Tribunal: Several state benches of the GST Appellate Tribunal are not operational, causing delays in dispute resolution.

About the GST Council

The GST Council, constituted under Article 279A(1) of the Constitution, is a joint decision-making body comprising the Union Finance Minister, the Union Minister of State (Finance), and state finance ministers. The Council makes recommendations on key GST-related issues, including tax rates and exemptions.

Way Forward

• Further Rationalisation of Tax Slabs: Although GST 2.0 reduced the number of rate slabs, further simplification is needed to create a more efficient tax structure.
• Reducing Compliance Burden: Lowering return-filing frequency for small taxpayers and utilizing advanced technologies for automated processes can ease compliance loads.
• Inclusion of Excluded Goods: Gradually bringing petroleum products and electricity under GST will remove cascading effects and simplify the tax system.
• Reducing Interstate Disparities: Support for states with lower GST collections can be enhanced through capacity-building initiatives and improved tax administration.

Frequently Asked Questions (FAQs)

Q1. What is the significance of the recent GST revenue collections?
Answer: The recent GST revenue collections indicate a positive trend in India's economy, reflecting a 4.6% year-on-year increase which is largely driven by festive consumption.

Q2. How has GST impacted the tax buoyancy in India?
Answer: GST has improved tax buoyancy from 0.72 to 1.22, indicating a more effective indirect taxation system with a broader tax base and enhanced compliance.

Q3. What are the current challenges faced by the GST framework?
Answer: The GST framework faces challenges such as frequent tax slab revisions, high compliance burdens on SMEs, and exclusion of key goods from GST.

Q4. Who constitutes the GST Council in India?
Answer: The GST Council is comprised of the Union Finance Minister, the Union Minister of State (Finance), and state finance ministers, responsible for key GST decisions.

Q5. What steps can be taken to improve GST efficiency?
Answer: Steps include rationalising tax slabs, reducing compliance burdens, including excluded goods, and supporting states with lower GST revenues through capacity building.