The seven-year itch: Scratching beneath the surface of GST numbers

Seven is a special number. Be it in 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 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 and impro­vements in logistics to robust revenue collections have all been examined at length.

Among the many perspectives, 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, concerns have been raised on the lack of availability of data, especially on refunds, as well as on the working of the GST Council. Let us delve deeper into each of these points beginning with revenue performance.

Revenue Relish

There has been considerable analysis of revenue collections under GST (1 and 2). While, there is little dispute regarding the robustness of gross revenue yields, in order to address the concerns raised about net GST collections, that is, 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 (3). This is then compared against the pre-GST revenue collections for taxes subsumed in GST for both the states as well as the Centre (4). The results are plotted 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. First, net revenue collections have been on a steady uptick and that the pace of growth has increased after the introduction of GST. Secondly, the year-on-year growth of net revenue averaged 12.76 per cent in the post-GST period (as against 11.81 per cent in the pre-GST period), 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.

Among other variables, revenue collections are a function of the tax rates. For context, 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 per cent (5).

As against this at the time of introduction, the effective GST rate was estimated as being 14.4 per cent. This was subsequently reduced to 11.6 per cent in September 2019 (6) and stood at 12.2 per cent in March, 2023 (7). In revenue terms, this can be quantified as a saving (stimulus?) for the economy in excess of Rs 4.3 trillion in just the last year. Comparing internationally, India’s GST rates are among the lowest in the world (Figure 2).

Tax buoyancy

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 (8) (Figure 3).

A question of Data

Admittedly, the revenue figures released on a monthly basis have typically featured gross collection figures (9). 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 (10). These reports feature month-wise details relating to the GST refunds on account of exports. Therefore, public visibility to refund 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 Centre (11). With the introduction of GST, the Centre and the states, pooled their sovereignty in matters related to administration of the new tax especially in areas such as policy making, 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 has 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 (12), 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. First, the collection efficiencies of GST are apparent, consistent, ab-initio and are 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 to its next phase of growth, there are a number of areas that will need to be addressed, such as simplification of the rate structure, inclusion of items left out of GST, as well as administrative issues such an efficient appellate mechanism. However, as GST turns seven, there is much to celebrate.

The author is an Indian Revenue Service officer of the 2007 Batch. Views presented are his own.

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

2.https://www.nipfp.org.in/media/medialibrary/2023/04/WP_392_2023.pdf

3.https://www.indiabudget.gov.in/doc/rec/allrec.pdf; Annex 2

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

5. https://pib.gov.in/newsite/PrintRelease.aspx?relid=132570

6. RBI State Finances Report 2019-20 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/STATEFINANCE201920E15C4A9A916D4F4B8BF01608933FF0BB.PDF

7. DEA White Paper on Indian Economy

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

9. https://gstcouncil.gov.in/gst-revenue

10. https://www.gst.gov.in/download/gststatistics

11. CP Chandrasekhar& J Ghosh (2023) GST Collections: Hype and Reality, Hindu Business Line, 15th May 2023

12. Levy of a uniform GST rate on all lotteries. Minutes of 38th Meeting of the GST Council Pg. 16; https://gstcouncil.gov.in/sites/default/files/Minutes/