Goods and services tax collection crossed the landmark of Rs 2.1 lakh crore for the first time in April. Truth be told, April has always seen higher collections, thanks in part to year-end adjustments in tax assessments. But what sets apart the latest haul is that a part of the 12.4 percent increase over last year was led by a healthy growth in domestic sales, particularly from premium products and services including automobiles, consumer durables, hotels and restaurant services.
Decisive action against fraudulent registrations, fake invoicing and stricter compliance norms also helped shore up the revenues. It’s likely that the average monthly collection will be lower than Rs 2 lakh crore in the coming months, but if the double-digit growth continues, then the 2024-25 budget targets will be comfortably outstripped like in 2023-24 and 2022-23.
While the headline number is heartwarming, one critical metric is flashing a sign of weakness. The GST-GDP ratio, which gauges tax revenue relative to the size of the economy, is yet to show a dramatic jump. From 5.7 percent in 2020-21 it rose to 7 percent in 2023-24, and has significant room for improvement.
One of the reasons is the slow growth in consumption demand—2.4 percent and 3.5 percent in the second and third quarters of 2023-24—that was held back by fragile rural demand even when urban spend on high-end products attracting higher tax rates fared extremely well. This rise in consumption was notwithstanding cesses, which will likely end in 2026. GST reforms involving rate rationalisation and extension of product coverage are imperative to increase the GST-GDP ratio.
The consumption-based levy was supposed to be a much simpler tax and it’s critical to speed up the process of rationalising the rate structure. Fears of a single-rate regime increasing household budgets at a time inflation remains sticky are not completely unfounded. So efforts should be made to adopt a three-tier rate structure and expand the tax base.
Besides, the authorities should improve tax administration and tribunals should speed up litigation. Above all, the Centre must resist the urge to impose new cesses that not only increase the tax burden but also lower the outgo to states. On their part, the GST Council and states should consider bringing in more products into the fold including petroleum, electricity and alcohol, as it would help lower the tax incidence.