GST collections indicate economic revival – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/gst-collections-in-a-good-state/article37630678.ece?homepage=true

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Even after accounting for the base effect, tax revenues have made a smart recovery in most States in Q1 of 2021-22

Goods and Services Tax is one of the major sources of revenue for the States as it contributes to nearly one-third of their own tax revenues. Hence, its recovery is very important for the revival of the State finances. Importantly, GST — being a destination-based consumption tax — is a good proxy for the performance of a State’s economy. Thus, the recovery of GST also indicates the recovery of the State’s domestic product.

How did States’ GST collection recover in the first quarter of this fiscal year (Q1:FY22)? Did it recover the lost revenue in the first quarter of the last fiscal year (Q1:FY21)? Importantly, what holds for the future of GST collection? What implications will it have on the GST compensation?

Trend in GST collection

Available data on the GST collection of 18 States taken from the GST portal (http://www.gst.gov.in) has been analysed. The GST revenue of a State is defined as the sum of SGST (State Goods and Services Tax) and IGST (Integrated Goods and Services Tax) settlement to the State.

In Q1:FY20, States’ GST collection on average grew at 12.7 per cent compared to the corresponding period in the previous fiscal (Q1:FY19). However, as Covid- induced lockdowns knocked the State economies back, revenue from GST plummeted. The figure (see graph) plots the first-quarter growth rate in the last three financial years. The orange bars show the gravity of the revenue fall, indicating that the GST collection in Q1:FY21 declined 47 per cent compared to Q1:FY20.

States that were badly hit in terms of GST collection are Kerala, Uttar Pradesh, and Madhya Pradesh. Kerala suffered the worst, as its collection tanked from ₹5,013 crore in Q1:FY20 to ₹2,160 crore in Q1:FY21, by 56.9 per cent. Odisha was relatively less affected (32 per cent fall).

The gradual weakening of the novel coronavirus, rollout of vaccines, and opening up of the economy led to the resumption of economic activity in full swing. Things were much better in the first quarter of 2021-22. This is reflected in higher GST collection in Q1:FY22. States on average grew by a whopping 98 per cent compared to the corresponding previous period.

States that have done remarkably well in Q1:FY22 in terms of GST growth are Gujarat, West Bengal, and Punjab (each more than 110 per cent), while Chhattisgarh, Karnataka, and Odisha (each less than 75 per cent) have performed poorly.

This sky-high growth rate in the GST collection might give an impression that States have bounced back. This conclusion can be misleading since the growth indicator fails to reflect the nature of recovery accurately when the comparison base is low or the comparison period saw a precipitous decline. The observed high growth rate in Q1:FY22 is due to the so-called “base effect”.

Anti-evasion moves

What explains this ridiculous growth number of the States? Besides the “base effect” and higher economic growth, measures like anti-evasion activities including detecting the incidence of fake input tax credit and action against fake billers, employment of data analytics evasion have contributed to higher collections.

Despite this stupendous growth, the revenue collection of some States is still below the first quarter of FY20, which was more or less a normal year. While seven States still lag, 11 have overshot the collection of Q1:FY20. It implies that one year of lost growth in GST collection for those seven States. Among the laggards, Kerala is the only major State with a whopping revenue shortfall of ₹563 crore in Q1:FY22 compared to Q1:FY20.

States that have comfortably surpassed Q1:FY20 collection by a margin of ₹500 crore or more in Q1:FY22 are Gujarat, Haryana, Maharashtra, Odisha, Telangana, West Bengal, Karnataka, and Punjab.

The 98 per cent growth (average of 18 States) may be exaggerated, but it’s still a promising figure, indicating a stronger recovery. Note that this astronomical growth has come despite the Covid-19 second wave, which was much more severe in India, and the resultant partial lockdowns across States.

This didn’t exactly knock the economy back, but it slowed it down. While the collection dipped around 50 per cent in May 2021 compared to April 2021, growth in June 2021 roared back for most of the States. Hence, the first quarter growth is by no means a small feat.

Compensation hit

Although growth in the collection has bounced back for most States, one year of negative growth in GST collection has had a severe consequence on GST compensation. States, per the Goods and Services (Compensation to States) Act, 2017, are Constitutionally guaranteed to get compensation for the loss on account of the introduction of the GST for five years from the date of implementation — that is, July 2017 to July 2022. Before Covid-19, States had revenue shortfall (the gap between the protected revenue and actual GST collection) and this aggravated after the pandemic.

As a result, compensation requirements increased sharply due to lower collection of GST and the compensation cess. It will have repercussions in that States might ask for a continuation of the compensation beyond July 2022 (the terminal year of compensation).

On the other hand, The Union government has been also falling short of collection and, more importantly, revenue collections from the GST compensation cess are falling drastically short of demand for the compensation amount. This issue is expected to dominate in the forthcoming GST Council meetings.

The other repercussion of reduced GST collection will be felt on the development expenditure of States. As States’ fiscal resources dry up, the impact is felt instantly on their capital expenditure followed by other developmental expenditures. This, in turn, will have reverberations in the developmentl outcomes such as health and education indicators.

Concluding remarks

While the growth numbers look robust, especially in the first quarter of FY22, sustaining them depends upon the pace of double-dose vaccination and the likelihood of a third wave of Covid-19.

The good news is that the latest data on GST collection indicates improvement in economic activity. The Indian economy also recovered at a fast pace (21 per cent growth) in the first quarter of 2021-22. The broad-based GDP growth coupled with anti-evasion measures to stem GST leakages continued unlocking in various parts of the country and various economic reforms announced by the government are expected to sustain this positive trend in revenue collection in the second half of the year.

However, the fact that the pandemic’s course now seems less certain than ever may pose a risk to sustaining this momentum.

The writer is an Assistant Professor at Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram. Views expressed are personal

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