The phenomenal gross GST revenue collection of April 2022 at Rs 1,67,540 crore is cause for celebration. This is the highest-ever revenue collection, and a growth by Rs 25,000 crore over the previous high in March. The total number of e-way bills generated in March 2022 was 7.7 crore. The month of April also witnessed the highest-ever tax collection in a single day – Rs 57,847 crore on April 20.
All this would suggest better compliance, tax administration and enforcement. The Central Board of Indirect Taxes & Customs (CBIC) deserves encomiums.
The first month of the new financial year also witnessed record merchandise exports, touching $38.19 billion, a 24.22 per cent rise over the corresponding month last year. India’s services exports also set a new record of $254.4 billion in FY22.
The S&P Global India Manufacturing (PMI) increased to 54.7 in April 2022 from 54.0 in the previous month. This has been ascribed to expansions both in new orders and output. PMI Services 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, however, one has to 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 is part of the reason for the rise in GST revenues. All rates being ad-valorem have also contributed to this surge in revenues. A study of how much of the increase in GST revenue is due to inflation and how much due to increased economic activity will be revealing. The tightening of input credit norms would have also contributed to the spurt in revenue.
Headline CPI was moving towards 7 per cent as against the market consensus of 6.4 per cent. The RBI, sanguine till now of being in control of inflation, has reacted. In a surprising off-cycle move that caught the markets off-guard, the RBI raised the policy rate by 40bps to 4.40 per cent. The cash reserve ratio (CRR) has been increased by 50 bps to 4.5 per cent.
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 a moot point if this will indeed control inflation.
These developments will have unintended consequences. The tightening of credit will have an adverse impact on both manufacturing activity and the service sector. It will impact the critical MSME sector the most. GST revenue going forward could get affected.
The Centre for Monitoring the Economy’s (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 recovered to 401.8 million in 2021-22. The numbers suggest that employment was still 7 million short of the pre-pandemic levels. Revenue nevertheless has done well. This is an unexplained paradox.
And in the legitimate exuberance of exports doing well, we should not lose sight of the increase in imports. Again, while this results in a robust contribution to GST revenues through the IGST route, it also contributes to a burgeoning trade deficit. The trade deficit in April 2022 was above $20 billion -- a growth of over 31 per cent in April 2022 over April 2021.
A GST council meeting is long overdue. In the backdrop of the robust revenue performance, it is an opportune time for the Council to seriously examine the GST rates. It is time to move towards a revenue neutral rate.
Thus, in the first instance, we could move slowly toward a weighted average rate of about 14.4 per cent, as was prevalent when GST was introduced. This will mean an upward revision from the present weighted average rate of 11.6 per cent. This has to be done in a gradual and calibrated manner.
This is also an opportune time for the GST Council to examine if petroleum products need to be brought into the fold. Their continued presence outside the GST ambit contributes to inflation, apart from militating against the concept of a value added tax. The Central Excise, cess and surcharge, and VAT imposed on these products are outside the value-added chain. Credit of these levies is consequently not available, adding to costs.
The GST Council will also have to take a call on the continuation or otherwise of the compensation cess beyond June 2022. Clarity on this issue is of critical importance for states to plan their fiscal affairs and for better federal relations.
Thus, while there is reason to celebrate, we should be acutely conscious of the challenges going forward. The government has its task cut out. To paraphrase Charles Dickens, it is the best of times, it is the worst of times.
(The writer is a former Chairman of the Central Board of Indirect Taxes & Customs)