GST Collections Hit A New Record In April, But The Road Ahead Might Get Bumpy

Central Goods and Services Tax (CGST) accounted for Rs 43,846 crore, State Goods and Services Tax (SGST) Rs 53,538 crore and the remaining Rs 99,623 crore came from Integrated Goods & Services Tax (IGST), including Rs 37,826 crore from imported goods and Rs 13,260 crore was collected from cess, according to latest data released by the government on Wednesday.

So, what is driving the high growth in GST collections?

Multiple Factors

The Indian economy appears to be on a roll, expanding at a 6-7 per cent pace that makes one of the fastest growing among the world's major economies. It is already the world's fifth largest economy and well on its way to become the third largest. The stock market, now the fourth largest in terms of market capitalisation, is scaling new peaks as we speak, in signs that Indian businesses are doing well.

According to the Centre for Monitoring India Economy, new investment announcement by the private sector more than doubled sequentially to Rs 11.4 lakh crore in the final quarter, January-March, of FY 2023-24. The announcements spanned across manufacturing sectors such as chemicals, machinery, and metals.

On the other end of spectrum, public investment continues to be robust, with significant increase in capitl spending on roads, highways and other infrastructure projects.

The Purchasing Manager Index (PMI) for manufacturing in March, compiled by HSBC India, surged to a 16-year peak of 59.1, driven by a strong growth in output and new orders. The services sector too has rebounded after a poor showing in February. PMI services data for March rose to 61.2 on the back of strong demand, improved efficiency, and sales.

FMCG industry witnessed a 6.4 per cent rise in sales volumes in the quarter ended December, 2023. FMCG sales growth in non-food category outpaced growth in food, indicating improved demand in discretionary items. This is also borne by the IGST data where nearly Rs 62,000 crore has been generated by domestic movement of goods and services.

While improved demand, through higher sales, has brought some buoyancy in GST collections, persistently high inflation also seems to have help. Since the GST rates are ad valorem, strictly from the point of view of increase in revenue, inflation helps yield a higher GST revenue for the same sales volumes. India’s retail inflation measured by consumer price index was around 4.85 per cent in March.

In addition, the nudge given by 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.

In the last 5 years, the DGGI has detected 16,676 cases involving evasion of Rs 2,32,524 crores. In contrast, there have been 12,893 cases of voluntary payment amounting to the collection of Rs 81,716 crore. Arrests and launching of prosecutions have also seen a significant increase. All this has a massive persuasive and salutary  effect on prospective evaders.

Thus the very impressive GST revenue figures in April 2024 is a result of all these multiple factors. However going forward they are several challenges looming.

Looking Ahead

The Economist in a recent article suggests ‘three intertwined deficiencies’ – poverty and disparity resulting in not enough demand; lack of trained people in the workforce and the concentration of growth in some areas -- that would be impediments going forward. Though one can question the analysis, these certainly are issues that the government is grappling with.

Merchandise exports have not been doing well. Our exports are still being led by the services sector. The problem is that the services sector does not generate as much employment as the manufacturing sector does. Overall exports, merchandise as well as services, in FY 2023-24 have been flat at US$ 777 billion compared to the previous fiscal year.

There is an overall trade deficit of about US$ 78 billion, despite a 6 per cent decline in imports. The deficit is largely on account of the poor showing of merchandise exports. Indian exporters continue to suffer from a  big cost disadvantage-logistics, high factor costs and lack of scale hurt them.

Sluggish exports have severely impacted creation of jobs. According to CMIE data, the unemployment rate (the percentage of labour force looking for a job) has risen to 8 per cent from 6.8 per cent. 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 46 percent as per the latest Periodic Labour Force Survey.

The summer has been searing. The India Meteorlogical Department (IMD) has predicted more than average heat wave up to June. The impact on agriculture and rural demand going forward in the year will have to be seen.

A McKinsey study suggests that the extreme heat conditions will impact the workforce. "Lost labour hours due to increasing heat and humidity levels could put roughly 2.5 to 4.5 percent of GDP at risk by 2030 equivalent to US$ 150-250 billion" as per this study. 

India’s tax to GDP ratio is poor. Direct tax to GDP ratio is 6.11 per cent and 0.3 per cent of tax payers pay 76 per cent of income tax, suggesting that the base needs to expand. With the ratio for indirect taxes being around 5 per cent, the overall tax-to-GDP ratio is at about 11.11 per cent.

These numbers need to get better. 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 and other concomitant factors also have to do well. This will be the challenge going forward.

(Najib Shah is former chairman of the Central Board of Indirect Taxes and Customs. Views expresed are personal)