After long deliberation, the goods and services tax (GST) was implemented in July 2017. Nearly two years have passed since, and there’s a widespread perception that GST revenue growth has not lived up to expectations. This is not a fair assessment. GST’s revenue performance must be measured against not the target set, but against the growth of nominal GDP.
An assessment was made by Kapil Patidar & Arvind Subramanian in June 2018. This showed that in the first year of implementation of GST, revenues grew by 11.9% and the buoyancy was 1.20. A buoyancy ratio over 1shows progressiveness in the revenue growth and opens up the prospect of a rising tax-to-GDP ratio.
This is a significant improvement over the pre-GST period when the buoyancy ratios for state value-added tax (VAT) and central indirect taxes like central excise and service tax were less than 1. The revenue performance is especially creditable given the transitional difficulties during implementation and teething technical problems with the GST Network (GSTN).
Some other analyses show that the tax-to-final consumption expenditure also grew from 10.3% in the year before GST (2015-16) to 11.9% (including adjustments for transitional credits) in 2017-18.
However, the state-wise picture shows that some states did better than the others. The states that had a high percentage of origin-based taxes in subsumed revenues — Bihar, Chhattisgarh, Himachal Pradesh, Punjab and Odisha — were found to lag behind in subsequent revenue performance.
The relative buoyancy of GST revenue compared to the pre-GST period is not surprising. This is a result of two factors. One, the design of GST that integrated the entire value chain from raw material to retail for the purpose of indirect taxation. This design reduced non-compliance in downstream trading, as these entities chose to register to avail of the input tax credit generated upstream.
The Economic Survey 2016-17 also points out that small units even falling within the threshold exemption limit opted for GST registration to avail of the input tax credit as they buy largely from bigger units.
Two, GST buoyancy was also aided by the tax incidence on services increasing from 14% pre-GST to 18% post-GST. The buoyancy in GST revenues is also reflected in the bump in the personal tax revenues on the direct tax side. Personal income-tax collections include the revenues of unincorporated enterprises that have tended to pay more direct tax revenues induced by their formalisation in the GST scheme.
A further surge in GST revenue will happen once land and real estate are brought under the GST net. This will clean up the land market and the revenue gains will be more on the direct tax side as more transactions are reported under GST.
A salutary impact of GST is the greater coordination between the Central Board of Indirect Taxes and Customs (CBIC) and the Central Board of Direct Taxes (CBDT). This reduces non-compliance and enhances revenues, a win-win for both departments. The I-T departments have incorporated information on GST registration and turnover in their return format.
A more detailed analysis of GST revenue buoyancy is hampered by the fact that there is no data on the sectoral profile of the new registrants and of separate revenue trends for goods and services. There is a perception in many states that revenue from services has lagged behind expectations. This can be rectified by a small modification in the format of the GST annual return.
This modification would require companies to indicate the HSN (Harmonised System of Nomenclature) code in eight digits in respect of goods supplied by them and accounting codes of each of the services provided.
Duty payment in cash should be indicated code-wise for each of the goods and services. At the time of evolution of GST, it was visualised that the monthly and quarterly returns would be kept simple and that the annual return would capture detailed information for compliance verification and data analysis. It would be a real pity if the analysis is hampered by insufficient data. Besides greater revenues, great success has been the emergence of the GST Council as a credible institution of cooperative federalism.
Its success has opened up the prospects of replicating this institutional arrangement in other sectors like power, agriculture and transportation. The GST impact goes beyond revenues and rates of duty. It has fundamentally transformed our federal polity for the good.