Model Answer
0 min readIntroduction
The Goods and Services Tax (GST), introduced in India on July 1, 2017, was a landmark indirect tax reform aimed at creating a unified national market. It replaced a complex web of multiple indirect taxes levied by the central and state governments. This simplification was expected to improve tax compliance, reduce cascading effects, and boost economic growth. However, the initial years of GST implementation witnessed revenue fluctuations and challenges in adaptation. Understanding the taxes subsumed under GST and its subsequent revenue implications is crucial for evaluating the success of this reform.
Indirect Taxes Subsumed under GST
GST subsumed a multitude of indirect taxes levied by both the Central and State governments. These can be categorized as follows:
- Central Taxes:
- Central Excise Duty
- Additional Excise Duty
- Service Tax
- Central Sales Tax (CST)
- Special Additional Duty of Customs (SAD)
- State Taxes:
- State Sales Tax/Value Added Tax (VAT)
- Central Sales Tax (CST) – levied by states
- Octroi
- Entry Tax
- Luxury Tax
- Taxes on lottery, betting, and gambling
- Purchase Tax
Revenue Implications of GST (July 2017 onwards)
The revenue implications of GST have been complex and evolved over time.
Initial Years (2017-2019): Revenue Shortfalls
The initial years following GST implementation were marked by significant revenue shortfalls. Several factors contributed to this:
- Technical Glitches: Initial issues with the GST Network (GSTN) portal hampered filing and compliance.
- Rate Rationalization: Frequent rate adjustments and clarifications led to uncertainty and impacted revenue collection.
- Compliance Issues: Businesses, particularly smaller ones, faced difficulties adapting to the new system, leading to lower compliance rates.
- Input Tax Credit (ITC) Mismatches: Discrepancies in ITC claims between suppliers and recipients resulted in revenue leakage.
According to data available until 2019 (knowledge cutoff), the government frequently had to compensate states for revenue losses, as guaranteed under the GST (Compensation to States) Act, 2017. The compensation was funded through a cess levied on luxury and demerit goods.
Subsequent Years (2019-2023): Recovery and Growth
From 2019 onwards, GST revenues began to show a recovery and consistent growth. This was driven by:
- Improved Compliance: Enhanced enforcement measures, including e-way bill tracking and data analytics, improved compliance.
- Rate Stabilization: Fewer rate changes provided greater clarity and stability.
- Economic Growth: A moderate recovery in economic activity contributed to higher consumption and, consequently, higher GST collections.
- Invoice Matching: Improved invoice matching mechanisms reduced ITC fraud and leakage.
In FY23, GST collections consistently exceeded ₹1.6 lakh crore per month, indicating a significant improvement in revenue performance. (Source: Press Information Bureau, Government of India)
Impact on Tax Buoyancy
GST was expected to improve tax buoyancy – the responsiveness of tax revenue to changes in GDP. While the initial years saw a dip in buoyancy, subsequent years have shown a gradual improvement. However, achieving the initially projected levels of tax buoyancy remains a challenge. Factors like economic slowdowns and the need for periodic rate adjustments continue to influence revenue performance.
The introduction of e-invoicing for businesses with a turnover exceeding ₹5 crore has further strengthened the GST system by improving transparency and reducing tax evasion.
Conclusion
The Goods and Services Tax has been a transformative reform in India’s indirect tax system. While the initial years were characterized by revenue shortfalls and implementation challenges, subsequent improvements in compliance, rate stabilization, and economic recovery have led to a positive trend in GST collections. However, sustaining revenue growth and achieving optimal tax buoyancy requires continuous monitoring, refinement of the GST system, and proactive measures to address emerging challenges like evolving economic conditions and technological advancements. The long-term success of GST hinges on its ability to foster a simplified, efficient, and equitable tax regime.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.