The phenomenal collection of gross GST revenues for April 2022 at Rs 1,67,540 crore is cause for celebration. This is the highest revenue collection ever and a growth of Rs 25,000 crore from the previous record high in March. The total number of e-way invoices generated in March 2022 was 7.7 crore. April also witnessed the highest tax collection ever recorded in a single day – Rs 57,847 crore on April 20.
All of this would suggest better compliance, better tax administration and better enforcement. The Central Board of Excise and Customs (CBIC) deserves praise.
The first month of the new fiscal year was also marked by record merchandise exports, reaching 38.19 billion dollars, an increase of 24.22% compared to the corresponding month of last year. India’s services exports also set a new record of $254.4 billion in FY22.
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The S&P Global India Manufacturing (PMI) rose to 54.7 in April 2022 from 54.0 the previous month. This was attributed to expansions in both new orders and production. The Services PMI rose to 57.9 from 53.6 in March, the highest since November.
Without trying to sound like a Cassandra always predicting doom and gloom, one must necessarily juxtapose these glowing numbers with other realities.
Inflation has been a persistent irritant. It’s bad from the common man’s point of view, but it’s part of the reason for the increase in GST revenues. All rates being ad valorem also contributed to this surge in revenue. A study of the part of the increase in GST revenue due to inflation and the part due to increased economic activity will be revealing. The tightening of credit standards for inputs would also have contributed to the income boost.
The headline CPI was heading towards 7% against a market consensus of 6.4%. The RBI, convinced until now to control inflation, reacted. In a surprising off-cycle move that caught markets off guard, the RBI raised the benchmark rate by 40 basis points to 4.40%. The cash reserve ratio (CRR) was increased by 50 basis points to 4.5%.
The result of these actions – the higher CRR will suck liquidity to the tune of Rs 87,000 crore from the system – will be higher bank lending rates, increased cost of capital. Given the geopolitical factors at play, it is debatable whether this will effectively control inflation.
These developments will have unintended consequences. The credit crunch will have a negative impact on both manufacturing activity and the service sector. This will have the most impact on the critical MSME sector. Future GST revenues may be affected.
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The Center for Monitoring the Economy (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 returned to 401.8 million in 2021-22. The figures suggest employment was still 7 million below pre-pandemic levels. Revenues nevertheless performed well. It is an unexplained paradox.
And in the legitimate exuberance of exports which are doing well, we must not lose sight of the increase in imports. Again, while this translates into a robust contribution to GST revenue through the IGST route, it also contributes to a burgeoning trade deficit. The trade deficit in April 2022 was over $20 billion, a growth of over 31% in April 2022 compared to April 2021.
A GST board meeting is long overdue. Given the robustness of revenues, the time has come for the Council to take a serious look at GST rates. It’s time to move to a neutral income rate.
So, initially, we could be slowly moving towards a weighted average rate of around 14.4%, as was the case when the GST was introduced. This will result in an upward revision from the current weighted average rate of 11.6%. This must be done in a gradual and calibrated way.
This is also the right time for the GST Council to consider whether petroleum products should be included. Their continued presence outside the scope of the GST contributes to inflation, in addition to militating against the concept of a value-added tax. The central excise, tax and surcharge as well as the VAT imposed on these products are outside the value added chain. Credit for these direct debits is therefore not available, which increases costs.
The GST Board will also have to take a call on whether or not to continue the compensation tax beyond June 2022. Clarity on this issue is critically important for states to plan their tax affairs and for better federal relations.
So, while there is cause for celebration, we must be fully aware of the challenges ahead. The government has its task cut out. To paraphrase Charles Dickens, this is the best of times, this is the worst of times.
(The author is a former chairman of the Central Excise and Customs Board)