The GST Council has to make crucial decisions regarding inclusion of petroleum products and streamlining tax slabs to fortify the robustness of the GST system
A Group of Ministers (GoM) set up by the GST (Goods and Services Tax) Council is currently reviewing the new tax regime with a focus on ‘simplification’ and ‘rationalisation’ as key objectives. GST is a single nationwide tax that subsumes within it more than a dozen taxes of the pre-GST era. Applied all over India, it has a provision of set-off for tax paid on inputs also known in common parlance as input tax credit (ITC). This makes the system free from the cascading effect of tax on tax besides encouraging businesses to report all their purchase or sales transactions.
Gross GST or GGST collection includes Central GST (CGST): it is levied by the central government on the intrastate movement of goods and services, i.e., transactions within one state; State GST (SGST): it is a tax levied on intrastate supplies of both goods and services by the particular state government where the product sold is consumed; Integrated GST or IGST collection: it is a tax levied on all interstate supplies of goods and/or services or across two or more states/UTs (it also includes collections from import of goods).
GGST also includes Compensation Cess or CC: it is levied on the supply of select goods and or services or both to compensate the states for loss of revenue arising due to the implementation of the GST regime. Initially levied for five years till July 1, 2022, it has been extended till March 2026 with the specific purpose of using the proceeds for repaying the loans that were taken during 2020-21 and 2021-22 to make up for the shortfall in collections from the cess vis-à-vis the compensation requirements of the states in those years.
During 2018-19 and 2019-20, monthly GGST collections generally remained below Rs 100,000 crore. During 2020-21, after plunging during the first half (courtesy of, the Covid-19 pandemic), collections bounced back to Rs 100,000 crore during the second half. During 2021-22, these picked up posting an average of Rs 124,000 crore. During 2022-23, the monthly average rose further to Rs 150,000 crore.
During the current FY, monthly average GGST collections have zoomed to Rs 166,000 crore during April-November 2023. It works out to a growth of 12 per cent year-on-year. Looking at the break-up, CGST and SGST collections have increased by 16.7 per cent and 15.4 per cent respectively. The CC collections are also up by 12.9 per cent. However, IGST collections have registered a smaller increase of only 8.6 per cent. This is due to a meagre growth of 2.6 per cent in IGST collections from the import of goods in turn, caused by an 8.7 per cent decline in merchandise imports during this period.
Tax collections depend majorly on three factors viz. tax rates, nominal GDP (NGDP) which is GDP at current prices and compliance. According to a study by the Reserve Bank of India (RBI) in 2022, the weighted average GST rate fell from 14.4 per cent at the time of inception of the GST to 11.6 per cent in 2019; courtesy, of a series of tax cuts brought about during this period. The 14.4 per cent itself was lower than the revenue neutral rate (RNR) of 15-15.5 per cent estimated by the Arvind Subramanian Committee. RNR is the tax rate that seeks to collect similar revenue under the new regime as collected from taxes under the erstwhile regime.
The increase in GST collections despite the rate cut, shows that the other two factors played a positive role. The surge in NGDP by 18.4 per cent during 2021-22 and 16.1 per cent during 2022-23 contributed to impressive growth in GGST collections in those years. During April – November 2023, growth in NGDP slowed to around 9 per cent. Yet, if GGST collections are up 12 per cent during this period, this is due to compliance and prevention of evasion.
Under the pre-GST dispensation, it was possible to remove goods from the factories without raising an invoice, move to the sale points and sell to the consumers without getting noticed hence, no payment of tax. The situation was aggravated by most of the transactions happening in cash which meant there wouldn’t be any trail.
Under GST, the activity of a firm about a transaction is under gaze at every stage. At the time of goods leaving its premises, it is required to generate an electronic or e-invoice – a document in a digital file format, just like a PDF file that is authenticated electronically by GST Network or GSTN. The firm is also required to generate an electronic Way or e-Way bill on the eWay Bill Portal. This document is required to be carried by a person in charge of the conveyance carrying any consignment of goods of value exceeding Rs 50,000/.
The government is also strengthening the GST infrastructure through measures such as the deployment of AI and ML-based analytics – it is the process of using ML (Machine learning) algorithms to aid the process of analytic evaluation of the data, aadhaar authentication for registration, calibrated action on non-filers, and so on. All these measures are geared to drive all businesses to be a part of the GST network, truthfully report all transactions and prevent fraudulent ITC claims.
As a result, between April 2018 and April 2023, the total number of GST returns filings increased by 56 per cent to 11.28 million while the number of active GST taxpayers rose 33 per cent to 13.96 million. As for detected evasion, on top of about Rs 100,000 crore detected during 2022-23, for the current FY, the government is expected to detect Rs 300,000 crore. Of this, it hopes to recover around Rs 50,000 crore during the current year itself. The trend in GST collections since FY 2021-22 instills confidence that the new regime is robust and healthy capable of generating high revenue on a sustainable basis. The GST Council should leverage this to address some pending issues.
First, it should consider taxing petroleum products under GST. Currently, these are taxed under the pre-GST regime entailing a much higher level of levy. For instance, in Delhi, the taxes (central excise duty or CED plus VAT) account for about 80 per cent of the ex-refinery price of petrol. Taxing it under GST will result in lowering this to 28 per cent (even if it is put in the highest slab). This means that the Centre and states will end up collecting over one-third of what they have been collecting till now. A resilient GST regime should be able to make up for this loss.
Second, it should transition from the current five tax slabs (namely nil, 5 per cent, 12 per cent, 18 per cent and 28 per cent) to a simple tax regime that GST was intended to be. While, the Dr Kelkar committee had recommended a single GST @12 per cent, even Arvind Subramanian had gone for the three rates regimes. For now, the GST Council may consider opting for Dr Subramanian’s approach.
Third, several sectors face an ‘inverted duty’ structure i.e., the tax on finished products is lower than that on raw materials (RMs) used in its production. For instance, GST on complex fertilisers is 5 per cent, against 18 per cent on ammonia and 12 per cent on phosphoric acid. This leads to output tax liability not adequate to offset ITC resulting in an ‘unabsorbed’ tax credit. The anomaly needs to be corrected by lowering the tax on RMs at least to the level of tax on finished products.
(The writer is a policy analyst; views are personal)
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