What is driving GST collections?

The officers next tallied the stock available in the factory with the stock recorded in the plant’s books— there was a shortage of raw materials and finished products. The manufacturer, the officers concluded, were stealthily removing the tobacco products with the help of a transporter. More than 200 fake invoices used by the transporter were seized.

Tobacco products have the highest GST slab—28%— and also attract a cess. The industry, therefore, is susceptible to tax evasion. Nevertheless, the use of data analytics and new IT tools are aiding investigation by enforcement agencies. They have been detecting large tax evasion cases frequently.

India’s tax collection figures, in some ways, underline the effectiveness of this tech-enabled policing.

GST collections have been remarkable—well above ₹1 trillion mark—every month since July 2021. In fact, GST revenue collections in March came in at ₹1.42 trillion, the highest since the indirect tax reform was rolled out in July 2017.

But it would be too facile to assume that only modern tech has played a role. What’s driving collections are a combination of factors that includes inflation. “The resumption of business activities after the covid wave, tighter compliances, closer monitoring of input tax credit coupled with the authorities’ increased use of data analytics, investigation and audits have contributed to the growth in GST revenue collections," says Pratik Jain, partner, Price Waterhouse & Co LLP.

We will revisit compliances in a bit. First, let’s examine the outsized role that inflation has played in propping up the collections.

The hand of inflation

Indirect tax buoyancy corresponds directly to inflation and high inflation does translate into high indirect tax buoyancy, explains D.K. Srivastava, chief policy advisor, EY India. “This trend will continue as long as petroleum products remain under pressure as fuel prices translate into input costs in various sectors such as transport and feed into the retail level," he says.

Wholesale price index (WPI)-based inflation had remained in double digits in the last financial year. Edible oils, basic metals and steel have been witnessing a price surge. Also, the surge in crude oil price in recent months—from $82 a barrel in October to $112.8 a barrel in March—has had a bearing on the prices of petrochemicals that are key raw materials for a host of industries including pharmaceutical packaging, automobiles, paint, polyester and synthetic rubber.

Besides crude oil, petrol, diesel and liquified petroleum gas (LPG), many manufactured items have witnessed high wholesale price-based inflation all through 2021-22. Some commodities have witnessed double digit inflation between April 2021 and February 2022.

Take steel prices for example. They have rebounded in 2021-22 from the year before due to higher iron ore prices and a pick-up in global and domestic demand. The demand-supply mismatches caused by the Russia-Ukraine crisis is likely to keep the commodity’s price firm in the coming months.

According to a research note from CARE Advisory Research & Training Ltd., world export prices of hot-rolled ribbed steel bar averaged $936.7 a tonne in the April 2021-February 2022 period, up 76% on a year-on-year basis. The research note also highlighted a 15% pick-up in domestic finished steel consumption at 87 million tonnes in the April-January 2022 period because of higher public spending on infrastructure, a factor that is also contributing to GST collections.

Meanwhile, new consumption trends have contributed to GST revenue buoyancy, too, says Suranjali Tandon, an expert on taxation and sustainable finance and an assistant professor at the National Institute of Public Finance and Policy (NIPFP). For example, the heavily taxed automobile industry has been a key source of revenue to the exchequer, although in certain cases, shortage of semiconductor chips used in cars has affected the industry quite a bit. Post the pandemic, demand for personal mobility spiked as people wanted to avoid public transportation.

According to a stock exchange filing, Tata Motors Ltd sold over 692,500 vehicles in the domestic market in 2021-22, a whopping 49% jump from a year ago. Cars, like tobacco, attract a 28% GST rate and cess ranging from 1% to 22% depending on the length and engine capacity of the vehicle.

Compliance matters

While finance ministry officials acknowledge the role inflation is playing on GST revenue receipts, they also point to a massive campaign launched against tax evasion.

“We cannot rule out the influence of that (inflation). And there is no denying the fact that there is a substantial improvement in tax return filing. The percentage and number have both gone up very substantially," says a government official who didn’t want to be identified.

Of the 1.28 crore GST-registered entities today, around 70 lakh are eligible for monthly return filing. The compliance in this category has gone up from about 45% a year-and-a-half ago to around 90% now. That’s a result of many compliance measures.

One of them is making tax credits available to the buyer of goods and services based on disclosures of the transaction and tax payments made by the seller.

In 2017, buyers were allowed an additional margin of 20% in terms of availability of tax credit. That is, if the tax credit available to a buyer on the basis of sales reported by the seller is ₹100, he could claim tax credit on a provisional basis for ₹120, meant to account for sales yet to be reported. This margin has been wound down entirely. From January 2022, credit for taxes paid on raw materials and services have been made available to businesses only after the seller pays the tax collected from the buyer to the government. The sales return is matched with the auto-generated purchase details of the buyer, too.

Over a period of time, tax authorities have introduced e-invoicing or real time reporting of business-to-business transactions on a government-run portal. Also, various returns to be filed by businesses are now getting auto-filled by information already captured in the system—such as e-invoices. Businesses can now see how much tax credit is available to them based on the reporting done by their suppliers.

“In case the buyer feels that some invoices are missing, he can ask them (the sellers) to upload the rest. With these changes in the architecture of return filing, we have not only simplified the process, we have made everything more transparent and visible. There is self-induced discipline because of which we have been able to reduce the extra margin we were giving in tax credit claims," the official quoted earlier says.

According to Suranjali Tandon, the formalization of the economy due to the indirect tax reform is also supporting GST revenue collection. “GST has subsumed various central and state taxes and has created an environment for better compliance. Also, we are seeing formalization of the economy. So, it is possible that the room for staying away from the tax net has reduced," she says.

The battle against fakes

Let’s circle back to the issue of fake invoices—tackling crooks manipulating books has been a major achievement of India’s tax administration since the GST rollout five years ago.

With data gathering picking up pace at all levels, mismatches such as issuing an invoice without the actual supply of goods can be identified.

Since goods transportation needs electronic permits (e-way bills) with details of the consignment and the vehicle, information captured in these documents can be cross-checked with vehicle movement data captured at toll plazas using radio frequency identification (RFID) tags stuck on commercial trucks.

Invoice manipulation has become far more difficult under the new indirect tax regime.

Mint, on 4 April, reported that a state ministers’ panel has now proposed integrating GST data with various government sources. The long list includes the Central Board of Direct Taxes, IceGate, National Payments Corp. of India, state government databases, Directorate of Revenue Intelligence, and the Directorate General of Goods and Services Tax Intelligence. GST data can also be integrated with third-party databases such as Map my India, payment banks, and point of sale (PoS) systems.

“Better enforcement and compliance of tax provisions as well as restrictions on input tax credit are definitely major contributing factors in improving GST collections," says Bimal Jain, chairman of indirect tax committee of industry body PHD Chamber of Commerce and Industry (PHDCCI). Jain pointed out that the introduction of e-invoicing—real time reporting of business-to-business transaction on a government portal—and the gradual expansion of its coverage has also helped in boosting tax revenue collections.

E-invoicing was made compulsory for businesses with ₹500 crore sales since October 2020 and has gradually been expanded to small businesses. From 1 April, it is applicable to business-to-business sales of companies with ₹20 crore sales or above.

Experts believe this shift has brought a big chunk of economic activity under the regulatory oversight of GST authorities.

According to Saket Patawari, executive director, indirect tax, at Nexdigm, a consultancy, pruning of customs duty exemptions on import of goods as well as recovery in sectors such as automobiles and tourism post the removal of partial lockdowns and curfews have helped in better revenue collection. Also, the extension of e-invoicing to businesses with ₹20 crore sales and more from April would help in plugging revenue leakages. He predicts sustained revenue collection over the next six-nine months from now on.

More to come

The GST system is all set for another major revamp, going ahead. The central and state governments are considering ways to make the system more efficient and productive.

Successive rounds of tax rate cuts after the GST rollout in 2017 has eroded the tax base. A major round of reductions came in 2018. The Reserve Bank of India, in 2019, stated that after multiple tax rate adjustments, the effective weighted average GST rate declined from 14.4% at the time of GST inception to 11.6%.

The Fifteenth Finance Commission, too, had pointed out in its final report that the rate neutrality of GST, which was compromised in multiple tax rate cuts, needs to be restored. Two ministerial panels led by Karnataka chief minister Basavaraj Bommai and Maharashtra deputy chief minister Ajit Pawar are working on the reforms needed—this will be taken up by the GST Council once the reports are submitted, expected later this month.

According to Suranjali Tandon, the government could study the elasticity of demand for goods and how it has behaved after every round of tax rate revision in the last five years. “That will give a sense of how far you can push the rates at the highest end, and the direction the rates should be going," says Tandon.

Also, if India has fewer rates, it reduces the room for industry lobbying for a lower slab, she adds.