Tax turbulence: Revenues take a hit in first full month of GST 2.0

Other macro indicators give mixed signals; car sales stay strong

Net revenues from the Goods and Services Tax (GST) crawled up 1.3 per cent year-on-year in November to Rs. 1.52 trillion, without factoring in GST Compensation Cess receipts, marking a sharp sequential moderation in revenues from the indirect tax in the first full month of economic activity under a rationalised rate structure.

 

Net GST Compensation Cess collections, reported separately for this month, slipped a sharp 69.06 per cent to Rs. 4,006 crore from nearly Rs. 13,000 crore a year ago. Including the cess receipts, overall net GST collections were down 4.25 per cent from November 2024.

 

Government sources sought to downplay the revenue impact by citing a sharp uptick in transaction volumes to suggest that consumption has surged, offsetting the impact of GST rate cuts that kicked in on September 22. However, other high-frequency indicators for the month painted a mixed picture, even as lower GST levies lifted passenger-vehicle wholesales 21 per cent Y-o-Y to about 425,000 units.

 

Railways freight volumes rose 4.2 per cent to 135.7 million tonnes, while demand for work under the rural employment guarantee scheme slipped 32 per cent year-on-year, making this the fifth straight month of decline. However, UPI transactions slipped 1 per cent in volume terms below October’s record, and 3.5 per cent in value terms. Industrial output slowed sharply, expanding at a 14-month low pace of just 0.4 per cent in October. Manufacturing activity, as measured by the HSBC Purchasing Managers’ Index, fell to a nine-month low of 56.6 in November. 

 

Gross GST revenues for November, which represents taxes paid for transactions concluded in October, were up 0.7 per cent at a tad over Rs. 1.7 trillion, but revenues from domestic transactions slipped 2.3 per cent from last November to Rs. 1.24 trillion. Sequentially, gross revenues were down 9.5 per cent and net revenues were 6.1 per cent below October levels.

 

Gross revenues from imports grew 10.2 per cent, lifting the overall net kitty into positive territory. Refunds to exporters, for GST levies on imports, were up 3.5 per cent, but refunds on domestic transactions fell 12 per cent, taking total refunds 4 per cent lower than November 2024 and 30.6 per cent below October’s refunds. This breaks a two-month streak of a sharp nearly 40 per cent spike in refunds.

 

In October, net GST revenue had risen only 0.6 per cent, the slowest pace of the year, even though the absolute mop-up remained strong at ₹1.69 trillion. According to data released by the Finance Ministry, gross and net GST revenues are now up 8.9 per cent and 7.3 per cent, respectively, through the first eight months of 2025-26, to Rs. 14.76 trillion and Rs. 12.79 trillion. But these numbers do not include the GST compensation cess, which has declined 14.3 per cent to Rs. 84,144 crore.

 

“Compensation cess is continuing only as a transitory arrangement till entire loan and interest liability are discharged,” a footnote to the November data statement said, referring to the use of the cess collections for repaying loans taken to recompense States during the pandemic period.  

 

While the increased consumption seems to have offset the impact of GST rate cuts as indicated by the marginal rise in GST collections, the asking rate for Central GST collections during the rest of the year is quite high, and a miss on this account seems inevitable, reckoned Aditi Nayar, chief economist at ICRA.

 

“While we believe that taxes will fall short of the FY26 Budget estimates, higher-than-budgeted non-tax revenues would absorb a part of this shortfall.  Overall, we do not expect a material fiscal slippage at the current juncture,” she added.

 

Sources in the government pointed to a sharp rise in consumption during the festive period “GST Bachat Utsav,” which followed the GST rate rationalisation exercise. According to government estimates, the taxable value of all GST supplies rose 15 per cent during September-October 2025 compared with the same period last year. In the previous year, the growth for the same two-month period was 8.6 per cent. Sources said this reflects a “Laffer curve-type” response, where lower GST rates on mass-use items boosted demand and improved compliance behaviour.

 

“As private consumption data will be released much later with the GDP numbers, GST taxable value serves as the most reliable real-time proxy for consumption, and the current numbers clearly indicate sustained demand expansion,” a government source said.

 

Government data shows particularly strong growth in sectors where rate rationalisation was implemented. The taxable value of supplies in September-October increased 17 per cent for prepared food items, 20 per cent for buses and passenger cars, 13 per cent for pharmaceuticals, 19 per cent for cement, ceramics and glass products, 12 per cent for goods carriers, 18 per cent for two-wheelers and bicycles, 17 per cent for tractors, 19 per cent for medical devices, 18 per cent for leather products, and 28 per cent under the “others” category.

 

This shows that companies have passed on GST savings to consumers and that no supply-side shortages were observed during the season, sources said, adding the growth in volumes is likely higher than the reported value growth because GST rates were reduced in many categories.

 

According to sources, growth in textiles slowed to 8 per cent in September-October from 12 per cent a year earlier, mainly because global headwinds and weak export demand pulled down the sector. Growth in two wheelers eased to 18 per cent from 23 per cent last year, as more consumers shifted towards small cars, dampening demand in this segment despite the festive season, they said.

 

“While the GDP data indicates a robust growth, the GST collections over the next four months would indicate whether the FY26 fiscal targets can be met as planned. There is wide divergence in the statewise collections and a sectoral causative analysis is essential at this stage to enhance the collections with necessary policy measures,” said M S Mani, partner at Deloitte India.

 

Saurabh Agarwal, partner at EY, said the softening in GST revenue collections was largely anticipated, reflecting the direct, albeit short-term, impact of the recent rate rationalization measures, with approximately 12 per cent to 15 per cent of goods moving from the 12 per cent and 28 per cent slabs into the lower 5 per cent and 18 per cent brackets. “Compounding this was the phenomenon of significant pre-stocking by businesses in the preceding month, to meet the anticipated surge in festive demand post rate rationalization,” he pointed out.