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What does a rise in GST revenue say about recovery?

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Photo: Mint

Goods and services tax (GST) collections grew 7% on year to 1.13 trillion in February, helped by improved compliance and stabilization of commercial activity. This also marked a fifth straight month of GST mop-up topping the 1-trillion mark. Mint explains:

Goods and services tax (GST) collections grew 7% year-on-year to Rs1.13 trillion in February, breaching the Rs1-trillion mark for the fifth straight month, on the back of improved compliance and a recovery in economic activity. Mint explores:

What is driving GST collections higher?

Normalization of the economy, aided by a corona curve that India managed to flatten since its mid-September peak. India’s lockdown to contain covid infections was as harsh as it was abrupt, snapping off supply chains. The economic seizure was felt most acutely in April, when GST revenue slumped to Rs32,172 crore, about a third of the previous two months. Since then, it has been trending higher as covid-appropriate behaviour allowed shops, markets and factories to resume operations, boosting demand for goods and services. Stringent steps against fake invoicing to claim input-tax credit also boosted collections.

What does this uptrend signal?

The steady increase in GST collections since September is a result of heightened economic activity and rising commodity prices. This shows that covid-related anxieties have abated, and consumption demand is perking up. A key indicator of demand is power consumption, which rose for a sixth straight month in February. Similarly, imports rose for the third month in a row. Other high-frequency data-points, such as car sales, manufacturing activity and fuel demand, indicate a strong economic revival. A gradual re-opening of hospitality and tourism sector will further buoy the economy and raise tax collections.


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Growth gallop

How did the services sector perform in February?

Activity in the services sector, which makes more than half of India’s GDP, expanded at its fastest pace in a year in February, driven by an increase in fresh orders and rising business confidence on the back of the immunization drive. Firms shed staff amid rising input-cost inflation, but jobs will come back as fresh capacities are added to ease order backlog.

What trend will GST collections follow?

GST revenues are likely to follow the uptrend in coming months. E-way bills, which must be generated to transport goods worth over Rs50,000, jumped by about one million in February over the previous month. It must be noted that GST collections in any month are for transactions done during the previous month. A rise in bill generation in February, which has fewer days, will translate into robust collections in March. As the services sector normalizes, and air travel and tourism operate full steam, expect the tax kitty to swell.

What are the potential risks to the economy?

The gradual recovery is a result of consumption revival, but private expenditure is missing. Consumption-led recoveries tends to be short-lived. As demand improves, hopefully, private investments will come alive. A fresh rise in cases has sparked concerns of a second wave, which can muddy investment. Also, a spurt in inflation can prompt central banks to tighten monetary policies, roiling financial markets. Inflationary pressures are building as a result of a rise in prices of commodities such as crude.

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