GST inflows high, time to cast tax net wider
In her first budget speech in July 2019, Finance Minister Nirmala Sitharaman indicated that GST collections would likely stabilise from FY22. The Covid-19 pandemic and the resultant economic slowdown were nowhere in the picture then, yet the promised star performance began rolling out. Gross collections stood at Rs 18 lakh crore in FY23, while monthly collections averaged Rs 1.5 lakh crore, thanks to the widening tax base and higher compliance. FY23 saw the highest-ever haul, so proponents see the sustained buoyancy in collections, notwithstanding global uncertainties, as a sign of India’s resilience. But critics rightly remind us that GST being a consumption tax, high inflation throughout FY23 played a significant role in cranking up numbers. If inflation eases this fiscal, reaching the ambitious monthly target of Rs 2 lakh crore collections or even sustaining the prevailing Rs 1.4–1.5 lakh crore monthly average should be possible, provided the government undertakes tax reforms.
In its six years of existence, the indirect tax reform has undergone several fine-tunings, yet it remains a work in progress. Though initial distractions like invoice mismatches, refund delays, and input tax credit uncertainties were ironed out, there are several areas that need immediate attention. Be it the setting up of appellate tribunals or dispute resolution mechanisms, the GST Council must summon strength and speed given the backlog of existing disputes. It should also revisit the contentious issue of rate rationalisation. In a 2015 study, then Chief Economic Advisor Arvind Subramanian indicated 15.5% as the revenue-neutral rate. But the latest studies indicate otherwise. An EY study last year found that merging existing rates into anything below 18% leads to revenue loss. Instead, several studies suggest 8%, 15% and 30% slabs to raise the GST-to-GDP ratio, which barely moved an inch compared to the pre-GST era.
Currently, GST has four slabs—5%, 12%, 18% and 28%—besides an exempt list including everyday essential items. Interestingly, a significant number of products fall under the exempt list and the 5% slab; given our socio-economic inequalities, these shouldn’t be tweaked. Likewise, the 28% slab includes luxury and sin goods, some of which also attract an additional cess. One sure way to raise collections without tinkering with rates is to bring petroleum products, real estate, alcohol and electricity under GST. Given the resistance from the states, if not as a whole, the Council can start small.