When the GST Council announced a rate rationalisation of the indirect tax regime — it was effectively a reduction in the tax burden on most things — it also embraced an opposing dialectic vis-a-vis revenue collections. On the one hand were the headwinds which would bring down GST collections for the similar amount of spends on goods and services, and on the other, was an expectation that consumers would respond to lower tax rates, in effect lower prices, and buy more, leading to a higher tax collection despite lower tax rates. The government put its faith in the latter.
The monthly GST data for October — it primarily reflects tax collections for business activity in the month of September — vindicates the government’s belief, for now. The monthly tax collections number has come in at ₹1.96 lakh crore. The nominal revenue hasn’t fallen in absolute terms compared to what it was last year, despite strong anecdotal evidence that many consumers deferred purchases for a fortnight to the period after September 22, when the reduced rates came into effect. There is good reason to believe that some of the staggered and larger-than-expected (on account of lower taxes leading to lower prices) purchases would have continued into October as well, and this will show up in the GST data released in December.
Does this mean the GST rationalisation will necessarily end up as a tailwind rather than a headwind for overall annual revenue for the current financial year? It is too early to jump to this conclusion because not only does one have to wait for October data, but one also has to see the trend for the rest of the fiscal year to ascertain whether some of the demand has just been advanced in the immediate aftermath of the rate cuts. To be sure, revenue collections, in a large, complex, and diverse macroeconomy such as India, are always determined by more than one variable. Things such as low inflation, for example, act as dampeners for revenue collection because they are a fraction of nominal incomes. Similarly, external volatility and its growth headwinds would also weigh down on income and taxes.
{{/usCountry}}Does this mean the GST rationalisation will necessarily end up as a tailwind rather than a headwind for overall annual revenue for the current financial year? It is too early to jump to this conclusion because not only does one have to wait for October data, but one also has to see the trend for the rest of the fiscal year to ascertain whether some of the demand has just been advanced in the immediate aftermath of the rate cuts. To be sure, revenue collections, in a large, complex, and diverse macroeconomy such as India, are always determined by more than one variable. Things such as low inflation, for example, act as dampeners for revenue collection because they are a fraction of nominal incomes. Similarly, external volatility and its growth headwinds would also weigh down on income and taxes.
{{/usCountry}}So, what is one to make of the latest monthly GST number? Two things can be said for sure: The rate cuts will not lead to a sharp falloff in revenue as some predicted, but it would be premature to proclaim a Big Bang.