14 June 2024

Goods and Services Tax (GST) in India: An Overview of Benefits, Challenges, and Revenue Growth

Introduction

The Goods and Services Tax (GST), implemented on July 1, 2017, represents one of the most significant tax reforms in India since independence. GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. It replaced a complex structure of multiple taxes, simplifying the indirect tax regime.

Benefits of GST

Simplification of Tax Structure: GST subsumes numerous indirect taxes, including VAT, service tax, excise duty, and others, into a single tax. This simplification reduces the complexity for businesses and helps in better compliance.

Reduction in Cascading Effect: By ensuring that tax is levied only on the value addition at each stage, GST eliminates the cascading effect of taxes (tax on tax). This has led to a decrease in the overall tax burden on goods and services, benefiting consumers.

Boost to the Economy: A unified tax system has created a common national market, enhancing the ease of doing business. It has also improved logistics and supply chain efficiencies, reducing transportation and storage costs.

Increased Revenue: With a more straightforward and transparent tax system, GST has helped curb tax evasion and increase tax compliance. This has potentially broadened the tax base and boosted government revenues.

Support for Digital Economy: GST encourages digital payments, promoting a cashless economy. The GST Network (GSTN) portal facilitates easy online registration, filing, and payment processes, enhancing transparency and efficiency.

Challenges of GST

Implementation Issues: The initial implementation of GST faced significant hurdles, including technical glitches on the GSTN portal, confusion over tax rates, and compliance burdens, especially for small and medium-sized enterprises (SMEs).

Multiple Tax Rates: GST in India is structured with multiple tax rates (0%, 5%, 12%, 18%, and 28%). This multiplicity complicates compliance and can lead to disputes and classification issues.

Compliance Burden: Despite simplifications, the compliance requirements under GST remain onerous for many businesses. Frequent filing of returns and maintaining digital records pose challenges, particularly for smaller firms.

Revenue Shortfalls for States: Some states have reported revenue shortfalls post-GST implementation. The GST Compensation Cess was introduced to mitigate this, but delays and disputes over compensation have created fiscal challenges for states.

Transitional Issues: Transitioning from the old tax regime to GST was difficult for businesses due to the need to update accounting systems, train staff, and understand new legal requirements. This led to short-term disruptions in business operations.

GST Revenue Growth: A Positive Trend for India's Fiscal Health

The financial year 2023-24 ended on a high note for India’s tax revenue, marking a significant achievement in both direct and indirect tax collections. The robust performance of the Goods and Services Tax (GST), which garnered a remarkable ₹20.18 lakh crore, reflects the maturity and efficiency of the GST system nearly seven years after its implementation.

GST Revenue Surge

In March 2024, GST collections for transactions conducted in February reached ₹1.78 lakh crore, the second-highest monthly collection since the tax’s introduction. The highest collection was in April 2023, driven by year-end compliance efforts. There is an optimistic outlook for March’s transactions, suggesting that the month’s collections might surpass ₹2 lakh crore, setting a new record.

Steady Growth in Monthly Collections

Throughout 2023-24, the average monthly GST collections stood at over ₹1.68 lakh crore, representing an 11.6% increase from the previous year. Although this growth rate is lower than the previous year’s 21.8% surge, it establishes a sustainable revenue benchmark. This consistency is crucial for long-term fiscal planning and stability.

Implications for Fiscal Planning

The impressive performance of GST collections alleviates concerns about the tax not meeting revenue expectations. Central GST collections have exceeded the revised estimates from the interim Budget, prompting the Finance Ministry to potentially revise its targets for 2024-25. The new targets can be achieved even with a growth rate below 10%, showcasing the robustness of the GST system.

Factors Contributing to High GST Collections

Several factors have contributed to the impressive GST collections:

  1. Improved Compliance: Enhanced compliance measures and technological advancements in the GST Network (GSTN) have facilitated better tax collection.
  2. Economic Activity: Increased economic activity post-pandemic has driven higher transactions, thereby boosting GST revenues.
  3. Efficient Administration: Streamlined administrative processes and regular audits have reduced evasion and increased transparency.
  4. Year-End Compliances: Typically, higher compliance towards the end of the financial year contributes significantly to GST collections.

Conclusion

The financial year 2023-24’s strong GST performance highlights the tax’s potential as a reliable revenue source for the government. The sustained growth in collections not only underscores the effectiveness of the GST regime but also paves the way for more ambitious fiscal targets. As India continues to fine-tune its GST system, maintaining this growth trajectory will be essential for supporting the country’s economic ambitions and fiscal health.

Nitesh Kumar Singh

Technical content writer l Website developer

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