Scratching beneath the surface of revenue numbers

GST and the Seven Year Itch

Devi Prasad Misra

Seven is a special number. Be it mathematics (Prime Numbers and Number Theory), music (seven musical notes), astronomy (days in a lunar phase), or mythology (Sapta Chakra, Sapta Samudra, or Sapta Rishi), the cycle of sevens is a constant around us.

It is apt then that, as the Goods and Services Tax (GST) turns seven this month, we take a moment to examine how GST, arguably the biggest tax reform since Independence, has fared since it was rung in at midnight on July 1, 2017.

Since then, GST has received considerable academic attention. Every facet, from the simplification of compliances to improvements in logistics to robust revenue collections, has been examined at length.

Amongst the many perspectives on GST, one has been the recent discussions on the revenue performance of GST, indicating, inter alia, that while gross revenue collections have been surging, net revenues have not kept pace and have only recently reached pre-GST levels. This slippage in net collections has been viewed with some consternation. Further, some concerns have been raised about the lack of availability of data, especially on refunds, as well as the workings of the GST Council. Let us delve deeper into each of these points, beginning with revenue performance.

The Revenue Relish

There has been considerable analysis of revenue collections under GST. While there is little dispute regarding the robustness of gross revenue yields, in order to address the concerns raised about net GST collections, i.e., revenue collections net of refunds [primarily on account of exports], we delve a bit deeper into the numbers.

We base our examination on GST collections as reported in the budget documents. This is then compared against the pre-GST revenue collections for taxes subsumed in GST for both the States and the Center. The results are plotted as shown in Figure 1, Right Axis. We also plot the year-on-year growth of GST collections as well as the year-on-year growth in GDP (Figure 1, Left Axis).

From the above, we can see three things. Firstly, net revenue collections have been on a steady uptick and that the pace of growth has increased post introduction of GST; secondly, the year-on-year growth of net revenue averaged 12.76% in the post-GST period (as against 11.81% in the pre-GST period), this is despite the exogenous shock of the pandemic; thirdly, we can see that net revenue growth has consistently outperformed GDP growth. This is reflective of systemic efficiencies in the new tax regime.

Amongst other variables, revenue collections are a function of tax rates. For context, we may recall that the improvement in tax collection efficiencies was accompanied by a significant reduction in tax rates. In the run-up to the introduction of GST, the Committee on the Revenue Neutral Rate (RNR) for GST had recommended a rate of 15–15.5%.

As against this, at the time of introduction, the effective GST rate was estimated at 14.4%. This was subsequently reduced to 11.6% in September 2019 and stood at 12.2% in March 2023. In revenue terms, this can be quantified as a saving stimulus for the economy in excess of Rs. 4.3 lakh crore in just the last year! It is interesting to note that, compared internationally, India’s GST rates are among the lowest in the world.

Tax Buoyancy: A Robust Measure of Tax Efficiency

A rising tide raises all boats. Revenue growth is a natural corollary of a growing economy, however, the growth (or buoyancy) of revenue collections over and above the growth in GDP is the real test of the systemic efficiencies of a tax system. On this account, in the five years prior to the introduction of GST, the net revenue buoyancy vis-à-vis GDP (at current prices) stood at 1.02, whereas it was 1.28 in the seven years post-GST. This is a testament to the collection efficiencies brought to the fore by GST.

In fact, India’s GST collection efficiency [the percentage collected out of the maximum possible tax, presuming perfect compliance and coverage across all consumption] stood at 0.61 in 2022–23. For context, comparing it against that of the 37 OECD countries sees India placed in the top one-third.

A question of data

Admittedly, the revenue figures released on a monthly basis have typically featured Gross collection. Net figures have been published only since February, 2024. However, annual statistical reports for each year since the introduction of GST have been published and placed in the public domain. These reports feature month-wise details relating to the GST refunds on account of exports. Therefore, public visibility for refunding data, although with a lag, has been there.

We move on to examine the averment, without any basis, that the GST Council is “dominated” by the Center. With the introduction of GST, the Centre and the States pooled their sovereignty in matters related to the administration of the new tax, especially in areas such as policymaking, fixation of rates, drafting of laws and rules, coordinating compliances, etc. This is at times cited as a restriction on the powers of the States. However, it is equally a “restriction” for the central government.

The GST Council, supported by its committees, has delved into a number of complex issues and come up with recommendations that have brought about symmetry in the administration of the law and stability in the rate structure.

It is a testament to the spirit of cooperative federalism that, save one, all decisions of the GST Council have been taken by consensus. Moreover, all decisions of the Council for improving compliance, plugging loopholes, or rationalising exemptions have benefited the Centre and the States equally.

From the above discussion, three points emerge: firstly, the collection efficiencies of GST are apparent, consistent, ab initio, and primarily on account of endogenous factors; this holds even when we look at revenue collections net of refunds; secondly, our tax rates as well as our collection efficiencies compare favourably with the rest of the world; and thirdly, GST has delivered consistent revenue growth even at lower tax rates and in the face of external shocks.

As GST moves into its next phase of growth, there are a number of areas that will need to be addressed, such as the simplification of the rate structure, the inclusion of items left out of GST, and administrative issues such as an efficient appellate mechanism. However,  as GST turns seven, there is much to celebrate.

(Views presented are the author’s own)

[1] The author is an Indian Revenue Service officer of the 2007 batch. The views presented are his own.

[2] (Debroy & Misra, 2023); https://ippr.in/index.php/ippr/article/view/233/101

[3] https://www.nipfp.org.in/media/medialibrary/2023/04/WP_392_2023.pdf

[4] https://www.indiabudget.gov.in/doc/rec/allrec.pdf; Annex 2

[5] NIPFP Working Paper 392; https://www.nipfp.org.in/media/medialibrary/2023/04/WP_392_2023.pdf

[6] https://pib.gov.in/newsite/PrintRelease.aspx?relid=132570

[7] RBI State Finances Report 2019-20: https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/STATEFINANCE 201920E15C4A9A916D4 F4B8BF01608933FF0BB.PDF

[8] DEA White Paper on the Indian Economy

[9] (Debroy & Misra, 2023); https://ippr.in/index.php/ippr/article/view/233/101

[10] https://gstcouncil.gov.in/gst-revenue

[11] https://www.gst.gov.in/download/gststatistics

[12] CP Chandrasekhar & J Ghosh (2023) GST Collections: Hype and Reality, Hindu Business Line, May 15, 2023

[13] Levy of a uniform GST rate on all lotteries. Minutes of the 38th Meeting of the GST Council, p. 16; https://gstcouncil.gov.in/sites/default/files/Minutes/