The surge in revenue from the goods and services tax (GST) does not reflect a broad-based economic recovery from the second covid wave shock; rather, it mainly shows a rebound in conspicuous consumption, cautions Suranjali Tandon, assistant professor at National Institute of Public Finance and Policy. She recommends a hike in the GST rates for high-end consumption items for further improving revenue collections and explains why collections from personal income tax are growing faster than from corporate tax. Edited excerpts from an interview:
There’s a lot of commentary about high GST revenues. What is driving GST collections growth?
GST revenues have surpassed ₹1 trillion for six consecutive months. A similar trend was observed during the previous financial year. Revenues and e-way bills raised rebound quickly when a covid wave abates. For this reason, GST revenue fits well as a high-frequency indicator of the economy’s recovery. The uptick in GST collections synchronized with recovery, but it also means that the rise in collections was from resilient sectors and products.
Are you saying the numbers must be read carefully? They may not be indicating broad-based economic recovery, but just resilience of high-end consumption.
Yes, while the GST tracks the overall growth in the economy, it conceals the distributive consequences. The overall economic recovery has been swift, but while there are sectors such as non-durables and commodities that have picked up, the capital goods sector has lagged. At the same time, the savings rate for households has declined, and conspicuous consumption has risen. Amid the peak of the second wave, there was a sharp increase in sales of premium branded cars. It isn’t surprising then that the GST collections dipped less sharply during the second wave compared with the first. This is telling of the nature of the recovery, where sectors and products consumed at the higher end by the rich have lifted GST revenue collections. Further, the supply chain disruptions and the weak capital formation have stoked inflation. In fact, there have been growing inflationary pressures throughout FY21, with inflation touching RBI’s target ceiling. The higher revenue collections seen are a combined result of rising prices, higher imports and, possibly, the pattern of consumption. It would be useful for policymakers to observe the product composition of GST collections not only to understand the nature of this recovery but also to guide future rate increases.
How does growth in corporate income tax collections after the rate cut compare with that for personal income tax?
The years between 2016-17 and 2019-20 were exceptional for corporate tax collections and personal income tax collections. This increase is associated with the strengthening of enforcement and information reporting. There was an effort to clamp down on shell companies, cash-based transactions as well as the expansion of TDS. While the gains in corporate tax collections were beginning to peter out, personal income taxes remained buoyant. This difference in the trends can be ascribed to the difference in policy changes pursued since 2019. While the corporate tax rates were further reduced, surcharges on top incomes were introduced, taking the effective tax rate on personal incomes above ₹5 crore to 42.7%. There is a fundamental difference between the profile of corporate taxpayers and personal income taxpayers. Forty per cent of corporate tax is received from fewer than 100 taxpayers, and the tax collections are concentrated at the top end of the income. On the other hand, personal income taxes are paid relatively evenly across the spectrum of taxpayer size. Therefore, the reduction in corporate tax rates resulted in corporate savings, which in turn did not lift the sentiment on investments. Whereas the increase in administrative oversight along with top rates resulted in the observed growth in personal income taxes.
What are the reasons for the low and stagnant central tax-GDP ratio? What can be done to break out of this stagnation?
It is often argued that India’s tax to GDP ratio is comparatively low, and there remains scope for reform. However, any comparison of the tax-to-GDP ratios without the context is misleading. That is, we must examine the ratio over time and compare, taking into consideration the size of the economy. India’s tax-to-GDP ratio steadily increased from approximately 14% in 1980 to over 20% in 2021. This increase resulted from decades of extensive reforms that include rate rationalization, mandatory reporting of PAN, voluntary declaration schemes and information gathering. However, this still pales in comparison with OECD countries such as France, with a tax-to-GDP ratio of 30%. There are two reasons for this. One, the growth in incomes has not been substantial. In fact, if we control for India’s per capita GDP, then the tax-to-GDP ratio for India is higher than its peers. The second factor is exemptions of certain kinds of income from income tax. For example, agricultural income remains out of the scope of income tax. Any increase in the tax-to-GDP ratio is expected to be muted unless these fundamental issues are addressed.
Raising the tax-to-GDP ratio without adverse consequences must be based on long-term vision. The current state of flux makes it hard to introduce major reforms. But over the next few years, a few measures can be taken. The current effective tax rate for GST is estimated at 11.6%. If it is true that the revenue surge from GST is from sectors and products that are resilient, there is scope to further raise the tax rates on high-end consumption items. Direct tax incentives and exemptions can be further reduced to expand tax base. Lastly, the income taxes on corporations could be made progressive to be in line with personal income taxes.