The incredible April GST revenue

The figures of GST revenue for the month of April 2022 have been published. Commentators are in a tizzy trying to understand the astounding numbers.

The gross GST revenue collection touched a phenomenal Rs 1,67,540 crore. This is the highest ever revenue collection. It reflects a growth by Rs 25,000 crore over the previous highest which was achieved just last month in March 2022.

The total number of e-way bills generated in March 2022 was 7.7 crore. This is the first time the 1.5 lakh crore mark has been breached. The month of April also witnessed the highest ever tax collection in a single day. April 20th 2022 saw a collection of Rs 57,847 crore.

The number of GSTR 3B returns (the consolidated monthly summary return of inward and outward supplies) filed were a staggering 1.06 crore. This accounted for filing percentage of 84.7 percent. GSTR 1 returns (the monthly statement of outward supplies to be filed by all GST assesses) filed also were up at 1.05 crore accounting for a filing percentage of 83.11 percent.

All this would suggest better compliance. This would suggest better tax administration and better enforcement. The Central Board of Indirect Taxes & Customs (CBIC) deserves encomiums.

The new financial year also witnesses record exports. India’s merchandise export in April 2022 touched USD 38.19 billion. This is an increase of 24.22 percent over the corresponding month last year. India’s services exports also set a new record of USD 254.4 billion in FY2021-22.

The S&P Global India Manufacturing (PMI) increased to 54.7 in April 2022 from 54.0 in the previous month. This has been ascribed to expansions both in new orders and output. The last PMI Services data available as on date (March 2022) also saw growth. The figure touched 53.60 as against 51.80 in the month of February 2022.

Without trying to sound like a Cassandra always predicting doom and gloom, one has to necessarily juxtapose these glowing numbers with other realities.

Inflation has been a persistent irritant. Paradoxically while inflation is bad, it has contributed significantly to the increase in GST revenues. All rates being ad-valorem have resulted in this surge of revenues. A study of how much increase in GST revenue is because of inflation and how much because of increased economic activity will be revealing. The tightening of input credit norms would have also contributed to the spurt in revenue.

Headline CPI was moving towards 7 percent as against the market consensus of 6.4 percent. The RBI sanguine till now of being in control of inflation has reacted. In a surprising and unexpected move which caught the markets off-guard, the RBI in an off-cycle meeting raised policy rate by 40 bps to 4.40 percent. The cash reserve ratio (CRR) has been increased by 50 bps to 4.5 percent.

The result of these actions will be higher lending rates of banks. It will mean an increased cost of capital. It is estimated that the higher CRR will mean sucking liquidity to the extent of Rs 87,000 crore from the system. Given the geopolitical factors at play, it is a moot point if this will indeed control inflation. But given its mandate of keeping inflation within the 6 percent band the RBI had to perforce react.

All these developments will have unintended consequences. It will have an adverse impact on both manufacturing activity and the service sector. GST revenue going forward could get impacted.

The Centre for Monitoring the Economy’s (CMIE) Consumer Pyramids Household Survey suggests that employment in India fell from 408.9 million in 2019-20 to 387.2 million in 2020-21. It recovered to 401.8 million in 2021-22. The numbers suggest that the employment was still 7 million short of the pre-pandemic employment levels. Revenue nevertheless has done well. This is yet another unexplained paradox.

And in the legitimate exuberance of exports doing well we should not lose sight of the increase in imports. Again, while this results in a robust contribution to GST revenues through the IGST route, it also contributes to a burgeoning trade deficit. The trade deficit in April 2022 was above USD 20 billion- a growth of over 31 percent in April 2022 over April 2021.

A GST council meeting is long overdue. This is an opportune time for the Council to examine seriously the GST rates. This is more so since better revenue performance is a reflection of better compliance and enforcement. It is a reflection that the taxpayer is settling down to the levy. It is time to move towards a revenue-neutral rate.

This can be done in a gradual and calibrated manner. Thus, in the first instance, we could move towards a weighted average rate of about 14.4 percent as was prevalent when GST was introduced. This will mean an upward revision from the weighted average rate of 11.6 percent which we have reached today.

This is an opportune time for the GST council to examine if petroleum products need to be brought into the fold. Their continued presence outside the GST ambit contributes to inflation apart from militating against the concept of a value added tax. The Central Excise, cess & surcharge and VAT imposed on these products are outside the value-added chain. Credit of these levies is consequently not available adding to costs.

The GST Council will also have to take a call on the continuation or otherwise of the compensation cess. Clarity on this issue is of critical importance.

To paraphrase novelist Charles Dickens, it is the best of times, it is the worst of times. And the Government has its task cut out.