Goods and Services Tax (GST) in India: A Deep Dive into Collections, Allocations, and Economic Impact

GST COLLECTION IN INDIA:

WHERE DOES IT COME FROM, WHERE DOES IT GO

The Goods and Services Tax (GST) has been a landmark for India's indirect tax reform since it was implemented on July 1, 2017. This comprehensive, multi-stage, destination-based tax has replaced a complex web of central and state taxes, streamlining the tax structure and promoting economic growth.

In this article, we delve into the intricacies of GST, its application, collection process, state-wise allocations, and its impact on the Indian economy. 📊📈

WHAT IS GST AND ITS APPLICATION?

GST is a consumption-based tax levied on the supply of goods and services. It is applied at varying rates depending on the product or service:

• 0% on essential items like food grains and milk 🥛

• 5% on common-use items like coffee and coal ☕️🪨

• 12% and 18% on most goods and services 🛒

• 28% on luxury and sin goods like high-end cars and tobacco products 🚗🚬

GST has emerged as a worthy successor, replacing multiple indirect taxes, including central excise duty, service tax, and value-added tax (VAT).🔄

GST COLLECTION PROCESS

Under the GST regime, the tax is collected by the central government and then divided between the Centre and the states based on a predetermined formula recommended by the Finance Commission.

The main components of GST are:

• Central GST (CGST): Levied by the central government on intra-state supplies 🏛️

• State GST (SGST): Levied by the state governments on intra-state supplies 🏰

• Integrated GST (IGST): Levied by the central government on inter-state supplies and imports 🌐

• Cess: Additional levy on certain goods like tobacco and aerated drinks 💸

GST SHARE OF THE CENTRE AND STATES

Under the GST system, states receive a share of the revenues collected by the central government. The current revenue-sharing formula, determined by the Finance Commission, allocates funds to states based on factors like population, area, income distance from the richest state, demographic performance, and tax effort.

1. Centre's Share:

   • The Centre retains the revenue from Central GST (CGST) collected on intra-state supplies of goods and services.

   • A portion of the Integrated GST (IGST) collected on inter-state trade is also retained by the Centre.

2. States' Share:

   • States receive 100% of State GST (SGST) collected in their respective states.

   • Approximately 50 percent of the IGST, which is collected on inter-state trade, is also given to the states.

   • 42% of the Central GST (CGST) is devolved to the states based on the recommendations of the Finance Commission

For the financial year 2023-24, total gross GST collection was ₹20.18 lakh crores, registering 11.7% YoY growth. The central government is expected to retain approximately ₹7.8 lakh crore of GST revenues, while ₹11 lakh crore is estimated to be devolved to states as their share of CGST and IGST. 💰 An additional ₹1.3 lakh crore was given to states as 50-year interest-free loans for capital expenditure

GST COLLECTION TRENDS

India's gross GST collections reached an all-time high of Rs 2.10 lakh crore in April 2024, marking a 12.4% year-on-year growth. 📊 

This is the first time GST collections have crossed the Rs 2 lakh crore milestone since its introduction reflecting the tax reform’s success! 🎉

Over the past five years, GST collections have shown an upward trend, despite the challenges posed by the COVID-19 pandemic:

• 2017-18: ₹7.4 lakh crore

• 2018-19: ₹11.8 lakh crore

• 2019-20: ₹12.2 lakh crore

• 2020-21: ₹11.4 lakh crore (impacted by the pandemic)

• 2021-22: ₹14.8 lakh crore

• 2022-23: ₹18.10 lakh crore

• 2023-24: ₹20.18 lakh crore

Key sectors driving GST collections include manufacturing, technology, climate-tech, agriculture, healthcare and education.

Increased economic activity in the formal sector, higher domestic transactions, and improved compliance have propelled GST revenue collections to hit record highs recently. For the first 9 months of fiscal year 2023-24, gross GST collections averaged ₹1.66 lakh crore per month.

However, with private consumption expenditure growth at multi-year lows and a confluence of other factors like the current heatwave, monsoon impact on agriculture, and global economic dynamics, the sustainability of robust GST revenue growth is uncertain.

GST collections have been uneven across states.

UTILIZATION OF GST FUNDS

The central and state governments use their share of GST revenues to finance various expenditures and development projects, such as:

• Infrastructure development 🏗️

• Social welfare schemes 🤝

• Agriculture and rural development 🌾

• Industrial growth and job creation 🏭

• Debt servicing 💸

• Administrative expenses 🏢

Key sectors driving GST collections include manufacturing, technology, climate-tech, agriculture, healthcare and education.

STATE-WISE ALLOCATION OF GST FUNDS

The allocation varies significantly across states, with some states receiving a larger share than others.

For FY 2023-24, the central government is expected to allocate approximately ₹12.2 lakh crore to states as their share of CGST and IGST revenue. Here's a breakdown of the expected allocation for each state:

• Uttar Pradesh: ₹1.83 lakh crore (17.9% of divisible pool)

• Bihar: ₹1.02 lakh crore (10.1%)

• Maharashtra: ₹40,137 crore (4.2%)

• Madhya Pradesh: ₹58,944 crore (6.1%)

• West Bengal: ₹52,947 crore (5.5%)

• Tamil Nadu: ₹40,657 crore (4.2%)

• Karnataka: ₹55,000 crore (5.6%)

• Rajasthan: ₹37,333 crore (3.8%)

• Gujarat: ₹31,737 crore (3.3%)

• Andhra Pradesh: ₹28,220 crore (2.9%)

• Telangana: ₹21,471 crore (2.4%)

• Kerala: ₹25,927 crore (2.7%)

• Haryana: ₹11,164 crore (1.4%)

• Punjab: ₹18,858 crore (1.9%)

• Chhattisgarh: ₹24,597 crore (2.5%)

• Jharkhand: ₹22,563 crore (2.3%)

• Odisha: ₹33,978 crore (3.5%)

• Assam: ₹22,394 crore (2.3%)

Other states and union territories receive smaller allocations based on the devolution formula.

📈 Based on data, some of the biggest beneficiaries of GST allocations for FY 2022-23 were Uttar Pradesh, Bihar, and Andhra Pradesh. 📉 On the other hand, Tamil Nadu, Telangana, Karnataka, Maharashtra, Gujarat, and Haryana received a lower share relative to their contribution to the GST pool.

Data suggests that for every rupee contributed to the GST pool, Bihar gets back ₹7.26, while Maharashtra receives only ₹0.08 and Tamil Nadu gets ₹0.28.

Why? The Centre has adopted a ‘pro-poor’ approach in the devolution of GST to states wherein rich states pay for poor states. The tax devolution formula devised by the Finance Commission works as such to assign weighted averages to each state.

The ultimate goal is for the holistic growth and development of all Indian states, lending a helping hand where needed through back loans to State Governments and Union Territories.

GST CONTRIBUTION TO INDIAN ECONOMY

The implementation of GST has had a significant impact on the Indian economy:

• Simplified tax structure, reducing compliance costs 📝

• Improved ease of doing business 💼

• Boosted formal sector growth 📈

• Increased tax base and revenue for the government 💰

• Reduced tax evasion and promoted transparency 🔍

Yet, GST has also faced criticism for its complex rate structure, compliance issues, and impact on small businesses. 😕

CRITICISM AND REFORMS

The GST revenue-sharing formula has come under criticism from some states, particularly those in South India. The share of southern states in the divisible tax pool has declined over time, in part due to the increasing weight given to the population. These states argue the formula does not adequately reward better economic performance and favors states with higher population growth.

Some of the main criticisms of GST allocation include:

• Perceived bias against economically advanced states 🏙️

• Inadequate consideration of states' fiscal performance and efficiency 📊

• Delays in the transfer of GST compensation to states 🕰️

To address these concerns and ensure a more equitable and efficient GST system, experts recommend the following reforms:

1. Simplifying the GST rate structure 📉

2. Expanding the GST base by including more items and reducing exemptions 📜

3. Reviewing the revenue sharing formula to give more weight to fiscal performance 📈

4. Lowering the GST revenue neutral rate to boost consumption

5. Improving the direct transfer of GST funds to states 💸

6. Strengthening the dispute resolution mechanism within the GST Council 🤝

Building on its early successes while addressing valid concerns, the GST system can become a more stable and effective pillar of public finance in India. A well-functioning GST is key to mobilizing the resources needed to fund India's development priorities in future. 💪🔮