Euphoria over GST revenues reveals lack of situational awareness

The one dataset that arrives regularly and promptly — and without the controversy that has shrouded official economic statistics in recent years — pertains to the revenues mobilised under the Goods and Services Tax (GST).

However, the euphoria with which GST revenues are presented by the government, and amplified in the media, reflects a serious lack of situational awareness or economic context.

The latest GST data released on May 1, for the month of April 2023, revealed that gross GST collections for April amounted to Rs 1.87 lakh crore. Media commentary characterised this as “a new record” or the “highest ever”, without anchoring these absolute numbers in a wider economic context or point of reference.

The only inference made by commentators has been that GST revenues in April 2023 were 12% higher than in April of 2021. But this is typically done without any attempt to assess whether this magnitude of increase is commensurate with the economy’s position now, relative to where it was a year earlier.

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Comparing revenues over time

There are at least three important factors at play in the economic dynamics which have a bearing on how much revenue growth can be worthy of celebration.

First, GST revenues need to be seen relative to the overall size of the economy. And, since the economy itself is growing, it is necessary to consider whether the growth of GST revenues is keeping pace with the expansion of the economy.

The second feature of a dynamic economy — prevailing price levels —complicates this further.

As everyone knows, painfully, last year’s rupee would have fetched more than what it does today. Thus, this year’s GST revenues need to be anchored relative to the prevailing price level in order to arrive at a ‘real’ assessment of how revenue growth has fared. This is necessary in order to remove the ‘price effect’ from distorting our perception of how revenues have fared in ‘real’ terms.

The third factor pertains to the very nature of the GST as a tax. Since it is a tax that is levied on final consumption, and since it is an ad valorem tax, price increases are automatically indexed as far as the government is concerned.

That is to say that since the GST is levied at a certain rate (with the realistic assumption that the rates on individual commodities/services are not being changed every now and then), the government’s take from GST, in proportionate terms, is automatically guaranteed at the point of consumption.

Incidentally, this explains why the classical canons of taxation have always regarded indirect taxes — GST is the prime example of this kind in India today — as being regressive and iniquitous. This is because the weight of the tax falls equally on all with no regard to the consumer’s ability to pay.

Comparing prices over time is a tricky affair in the best of times. Usually this is done by using specifically designed indices. However, none of the main Indian price indices — the consumer price indices for various categories of workers or the wholesale price index — are suitable simply because services are outside the scope of these indices.

This is not trivial, given the fact that services account for more than half of all the Gross Value Addition (GVA) in the Indian economy. It also makes sense to consider GST revenues as a proportion of GVA, instead of Gross Domestic Product (GDP), because taxes are already subsumed in the latter.

Fortunately, a simple device is available in order to neutralise the ‘price effect’. Note that tax revenues are always presented in current prices prevailing during a given period, which is why you never ever hear the Finance Ministry (or any economist) referring to tax revenues in ‘real’ terms.

By taking GST revenues in a given time period and estimate this as a proportion of the GVA, both expressed at current prices. This enables the neutralisation of the ‘price effect’ so that a comparison of revenues as a proportion to the size of the economy is possible.

GST performance

Now, let us look at how GST revenues have fared relative to the economy. Gross GST collections in 2022-23 amounted to Rs 18.06 lakh crore. GST revenues accounted for 7.31% of GVA (Rs 247 lakh crore at current prices) in 2022-23, according to the latest estimates provided by the National Statistical Office in February 2023.

More significantly, while GVA expressed in current prices is expected to increase by 15.24% in 2022-23, GST revenues have increased by 21.43%. The difference between the two — 6.19% — would appear to provide a realistic estimate of the magnitude of the ‘real’ increase in GST revenues after neutralising the ‘price effect’.

How good is that increase? For one, that would be just about comparable to the expected growth of about 6% in 2022-23. And, given the very nature of the GST as an indirect tax applicable on almost all consumption, this should be expected in the normal course.

But worryingly, the buoyancy of GST as a tax — which captures the differential growth in the size of the economy relative to the growth of GST revenues — has been on a decline since the catastrophic collapse during the pandemic. Tax buoyancy in 2022-23 (expressed as a ratio) was about 1.40, lower than 1.69 estimated for 2021-22.

More distressingly for the states, a recent review of the GST by Prof. Sacchidananda Mukherjee of the National Institute of Public Finance and Policy indicated that the states are worse off under the GST regime. He estimates that current rates of buoyancy are below buoyancy rates for the taxes that were surrendered by the states and subsumed in the GST in 2017.

Clearly, there is little to be euphoric about. But then, that is the price to be paid when statistics, especially economic statistics, is weaponised for partisan battles.