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A reform window: on the GST trajectory

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A reform window: on the GST trajectory

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The financial year 2023-24 appears to have ended on a high on the revenue front. Net direct tax collections rose 19.9% by mid-March to hit 97% of revised Budget targets, while the Goods and Services Tax (GST) has yielded a robust ₹20.18 lakh crore. Gross GST revenues in March, for transactions undertaken in February, crossed ₹1.78 lakh crore, the second highest tally since the rollout of the indirect tax six and a half years ago. The only month when collection stood higher was in April 2023, aided by year-end compliances. There is a good chance the same compliance effects will lift this month’s tally past ₹2 lakh crore, marking a fresh high. Average monthly collections have grown 11.6% in 2023-24 to over ₹1.68 lakh crore. The growth may be lower than the previous year’s 21.8% uptick but establishes a new normal for revenues that the coming year can build on. This should settle the Centre’s concerns that the GST has not yielded expected returns. Central GST collections in 2023-24 have overshot revised estimates presented in the interim Budget and the Finance Ministry may have to revise its 2024-25 targets when it presents the full Budget as those can now be achieved even if growth slips below 10%.

Some of the increase in collections may well stem from tax demands raised for past years and tightening the screws on known evasion routes such as fake invoices and fraudulent input tax credits. Yet, an uptick in growth of net GST revenues, which the government has started revealing since last month, and the rise in gross collections from domestic transactions (17.6% compared with 13.6% in February) suggest economic activity has been busy in the last quarter of 2023-24. Perhaps, the only worry is a 5% decline in GST on goods imports during March, from an 8.5% rise in February, which may signal some cutbacks in discretionary consumption. Yet, the overall GST trajectory should give the next government comfort to focus on much-needed reforms to the tax. This must include retrieving the plan to rationalise its multiple rates from deep freeze, expanding it to excluded items such as electricity and petroleum products, and reducing high levies on key products such as cement and insurance. The GST Compensation Cess, now being used to repay the COVID-19 pandemic-era borrowings made to recompense States, raked in ₹1.44 lakh crore last year, and it is likely possible to wind it down earlier than the extended March 2026 deadline. It is critical to resist the temptation to replace it with a new levy except for truly demerit goods such as tobacco. Taxing hybrid vehicles over 40%, for instance, makes no sense, either for India’s green goals or boosting consumption and spurring private investments.

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