GST revenues have exceeded Rs 1 lakh crore for the eleventh consecutive month. As per the data issued by the Ministry of Finance on September 1, the gross Goods and Services Tax (GST) receipts climbed to 1,43,612 crores for August 2022, which was consecutively lower than the preceding month but 28.2 % growth over the previous year.
The rise in GST collections was bolstered by a recovery in consumer spending, high inflation rates, and a partial influence of the rate hike decisions made at the 47th Council meeting, which came into force along with a broader economic revival. Let us understand the reasons behind this surge.
Decisions made at the 47th GST Council Meeting
The GST Council, in its 47th meeting that coincided with the 5th anniversary, had recommended rationalizing GST rates and withdrawal of exemptions on certain goods such as pre-packaged and labelled food items. While the changes intended to reduce and correct the inverted duty structure and allow credits on inputs and input services on goods that were previously exempted, the difference in GST rates has also pushed collections in the last month.
The GST council introduced tax on numerous supplies like, low-cost hotel accommodation, hospitals, storage or warehousing of specified commodities, services by RBI, IRDA, SEBI, FSSAI, and GSTN would contribute to higher tax collections.
Rise in inflation
In notion, it's eye-opening to note that inflation is also responsible for this. Nearly 8% of the current surge in the GST collection can be attributed to higher inflation. Record-high inflation (wholesale inflation of 13.9 percent) led to high wholesale and retail prices pushing GST revenues to a high extreme. The high retail and wholesale prices also pushed GST collections up on domestic inflation.
The rise in consumption in real terms is just 2% above pre-pandemic levels. Through this, it can be inferred that the contribution of consumption rise in record GST collection is less than the rising inflation.
Data suggests that nominal GDP growth and indirect tax collection strongly correlate. Therefore, the price surge has been one of the most critical factors for higher GST collections.
Significant improvement in tax compliance
The fact that the government is now utilizing technology to its advantage is a key reason for the rise in tax compliance.
On April 20, 2022, the most significant tax revenue till date was collected in a single day. Compared to the 92 lakh returns submitted in April 2021, 1.06 crore GST returns in GSTR-3B were filed in April 2022. The percentage of GSTR-3B filings in April 2022 was 84.7%, up from 78.3% in April 2021, while the rate of GSTR-1 filings in April 2022 was 83.11%, up from 73.9% in April 2021.
This demonstrates a noticeable increase in compliance behavior, which has encouraged taxpayers to file forms on time, to make compliance simpler and smoother, and to ensure strict enforcement action against irregular taxpayers by detecting them through data analytics and artificial intelligence. Better compliance has led to better tax collections.
Contributions by individual states
The increase in GST collections has also been spurred by measures against tax evaders, notably those led by state authorities. Odisha saw a growth in GST collections, mainly from the mining and manufacturing sectors. The reason is the successful auction of iron ore mines by the Odisha state government contributed significantly to increasing tax revenue this year. The service, trading, and works contract sectors have also recorded growth in the current financial year.
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Maharashtra's GST collections are the highest in the country, thanks to improved compliance and economic revival, mainly due to the CAPEX push by the Centre and States.
To contribute to the record-breaking collections, individual states have done well. Odisha, Maharashtra, Haryana, and Andhra Pradesh all forecast a more than 21% increase in revenue.
States now understand that the prosperity of individual state depend on prosperous revenue collection, for which alone the central government cannot be made liable.
Surge in imports
A considerable surge in goods imports is another reason behind the massive rise in GST.
Goods imports in 2021-22 jumped up around 56% to $612 billion. Under GST, imports are deemed inter-state supplies and are subject to an integrated GST. The integrated GST from imports stood at INR 3.8 lakh crore in 2021-22, around 41% higher than in 2019-20. The overall GST in 2021-22 was 22% higher than in 2019-20. This tells us that higher imports have pushed up GST collections.
Government initiatives
Another factor contributing to the increase in collections is the government's numerous initiatives, including extending the e-invoicing system to broaden the taxable base and the tax department's diligent governance.
Compulsory e-invoicing of business-to-business (B2B) transactions for enterprises with an annual turnover of more than ₹20 crores boosted GST registrations. Extending the scope to include small and medium-sized businesses will not only assist in expanding GST coverage but will also help to block leakages. It aided in the reduction of tax evasion, resulting in higher tax collections. Furthermore, the reduction in annual turnover from ₹20 crore to ₹10 crores, which will take effect from October 1, 2022, will positively impact GST collection by raising the number of taxpayers.
Auto-population of tax forms has enhanced the accuracy of the data in statutory returns, squeezing out clerical errors and deterring fraudsters from claiming ineligible tax credits.
Earlier interest had to be manually calculated, which necessitated assessment & audit. Whereas now GSTR-3B computes & auto-populates interest applicable in cases of delayed return filing. This functionality has enhanced revenue and reduced litigation on account of non-payment and lesser payment of interest liability.
Increase in demand
The outbreak boosted extensive IT and FMCG industries, and pent-up demand has also raised company earnings and underpinned tax payments. The adoption of crypto tax has helped propel government revenues by widening the tax base and doubling the number of taxpayers.
Corporate tax receipts have significantly increased as more businesses abandon SEZs tax holidays. That induced companies to invest more in newer projects, which led to higher consumption of infrastructure materials like like steel, cement etc.
What next?
Since India's Goods and Services Tax was introduced five years ago, revenue collections for the government have risen significantly; the GST system has seen various turbulent stages. Due to a drop in consumption, the nation went into a downturn in 2020, culminating in a modest 5% increase in GST income. The pandemic and severe lockdowns prompted an 8.6% drop in average sales in 2021.
But a rebound in economic growth in FY22, primarily due to the Centre's and states' push for capital expenditures, and reduced revenue leakage resulted in a significant boost in monthly collections of 30.48 percent over the previous financial year. The revenue was 19.2% more than in 2020 before the outbreak.
Since collections have continuously exceeded Rs 1.3 billion since October 2021, it is not surprising that the revenue exceeded in April 2022; for the first time, it reached Rs 1.67 lakh crore, setting a new record despite escalating geo-political disputes in Russia and Ukraine.
If India fulfils its goal of turning into a 5-trillion-dollar economy, these tax collections could surge to as much as Rs 18 trillion.
(Rajat Mohan is Senior Partner and Samiksha Goswami is legal associate at AMRG & associates. These are the writer's views.)