JOIN USHigh inflation, not growth, has pushed up GST collection
Social media thrives on simplistic one-line explanations of complicated economic phenomena. These simplistic explanations appeal to the human mind, given that they can be understood and communicated easily.
Now, take the case of the massive jump in the GST collection. The total GST collected in 2021-22, the last financial year, stood at Rs 14.9 lakh crore, up 31% from 2020-21 and 22% from 2019-20. In fact, collections in the month of April 2022 stood at an all-time high of Rs 1.68 lakh crore.
These numbers are impressive. Using these numbers, many individuals on social media have come to the conclusion that the GST collections are up because the Indian economy is doing well. This is a simplistic conclusion that has gone down well with many people. But in economics, simplistic explanations are rarely right.
So, why have the GST collections gone up really? The economy in 2021-22 was in a much better situation than it was in 2020-21. This explains some jump in collections. Nonetheless, there are more important reasons behind the jump than just economic revival. The first is inflation. The wholesale inflation in 2021-22 was at 13%. It has been in double digits since April 2021. Even retail inflation was at a relatively high 5.5%. This inflation has pushed up GST collections to some extent.
Let’s understand this through an example. Let’s consider a product that sells at Rs 10,000 per unit. A GST of 18% on it amounts to Rs 1,800. Let’s say the price of the product rises by 10%, and it is now priced at Rs 11,000. A GST of 18% on this amounts to Rs 1,980. The point being that high inflation is directly proportional to GST collections.
Also, what has happened in the Indian case is that the well-off have come out financially stronger after Covid. As analysts Sumit Shekhar and Eashaan Nair of Ambit pointed out in a recent research note, “the higher GST collections have been driven by…[an] uptick in high-ticket consumption post-pandemic even if mass consumption has suffered.”
Over and above this, a huge surge in goods imports is another reason behind the massive rise in GST. Goods imports in 2021-22 jumped up around 56% to $612 billion. Under GST, imports are deemed inter-state supplies and are subject to an integrated GST. The integrated GST from imports stood at Rs 3.8 lakh crore in 2021-22, around 41% higher than it was in 2019-20. The overall GST in 2021-22 was 22% higher than that in 2019-20. This tells us that higher imports have pushed up GST collections.
In fact, the interesting thing is that inflation is responsible for this as well. Let’s understand this through the example of crude oil. From April 2021 and February 2022, the latest data available, India bought 256 million tonnes of crude oil and its products. This was around 9% more than the quantity bought between April 2020 and February 2021. The total bill for this came to around $142 billion, which was almost double (96% higher to be precise) the import bill from April 2020 to February 2021.
So, while import of oil and oil products increased by around 9% in volume terms, the import bill more or less doubled. Why? The answer is inflation or the rise in price of oil and oil products. The average price for importing oil and oil products from April 2021 to February 2022 stood at $556 per tonne, around 80% more than the price from April 2020 to February 2021.
A similar story plays out for coal as well. The total coal import bill for 2021-22 was at $32 billion (April 2021 to February 2022), almost doubling from the same period in 2020-21. In comparison to 2020-21 (April 2020 to February 2021), the quantity of coal imported during 2021-22 was down 5% to 189 million tonnes. But the average price at which coal was bought from April 2021 to February 2022 stood at $144 per tonne, almost double that from April 2020 to February 2021. Hence, the higher price of coal imports pushed up GST collection as well. Finally, tighter compliance by the central government has also helped in pushing up collections over the last two years. GST collections have been higher than Rs 1 lakh crore in 18 out of the last 19 months.
To conclude, several reasons have pushed up GST collections. Anyone attributing the higher collections just to a revival of economic growth either has just bought into the simplistic reasoning that has been sold to them on social media or has an agenda to run. As a general rule, on most occasions, anyone explaining economics in a single line should not be trusted.
(Vivek Kaullives to read crime fiction, and unlike his honest ancestors, makes a living writing on economics @kaul_vivek)