Why high GST collection is bad taxation and bad economics

Amidst the looming threat of Omicron, December 2021 brought cheers as the GST collections crossed the magic mark of ₹1 lakh crore (at ₹1.3 lakh crore) for the sixth time in November, out of eight months of the current fiscal (FY22) , and raised hopes for faster economic recovery.

This was indeed a welcome development for the government short of fiscal resources, except it perpetuates a regressive tax regime in which indirect tax, like the GST, plays a dominant role in total tax revenue. In contrast, developed nations collect most tax revenues from direct tax. As per the latest data, the OECD average for direct tax collection in 2018 (close to India’s FY19) was 67.3% of the total tax collection , while for India, it was 38.3% (for FY19).

Here is a comparative picture of India’s tax revenue collections in FY22.

The total GST collection (centre and states combined) for April-October 2021 was ₹8 lakh crore (if the November collection is added, the total goes up to ₹9.4 lakh crore). The Controller General of Accounts (CGA) data shows, during the same period (April-October 2021) direct tax – corporate and income tax from non-corporate entities – amounted to ₹6.4 lakh crore. This calculation ignores other indirect taxes like customs, excise, service tax and others and hence, the difference between direct and indirect tax collection is much wider.

Here is another way of presenting the regressive tax system.

Taking all direct and indirect taxes together, the long-term trend (centre and states combined) shows the annual average of direct tax revenue was 6.6% of the GDP during the past decade of FY12-FY21. In the same period, the annual average of indirect tax was far higher at 10.6% of the GDP.

High indirect tax collection is regressive because indirect tax doesn’t distinguish between the rich and poor (capacity to pay) as everyone pays the same tax rates. On the contrary, direct tax is on the income levels/profits and is thus based on the ability-to-pay principle of taxation. When direct taxes fall, tax burden shifts to the poor – as we will see later.

Corporate tax falls below income tax

FY21 will not only be remembered for historic high corporate profits but also for falling behind income tax from non-corporate entities for the first time in the 2011-12 GDP series.

The Budget documents show, in FY21 (RE), corporate tax collection fell to ₹4.5 lakh crore (23.5% of the gross tax revenue), while that of ‘tax on income other than corporate tax’ went up to ₹4.6 lakh crore (24.2% of the gross tax revenue).

The drastic fall in corporate tax had begun with the corporate tax cut of ₹1.45 lakh crore of September 2019. In FY20, corporate tax collection went down by 16% from FY19 (from ₹6.6 lakh crore to ₹5.6 lakh crore). The trend will continue in FY22 (BE) as corporate tax is budgeted to yield ₹5.5 lakh crore (24.7% of the gross tax) as against ₹5.6 lakh crore from tax on income other than corporate tax.

This is problematic because it has pulled down the total tax revenue the government needs for higher fiscal spending. Besides, lower corporate tax is regressive for the reason explained earlier. Corporate entities are financially bigger entities with more capacity to pay, while tax on income other than corporate tax is paid by relatively lesser mortals, like individuals (salaried or self-employed), partnership firms, trusts etc.

Tax burden shifts to poor

What happens when direct tax, like corporate tax, go down?

Indirect taxes go up.

Apart from the high GST collections, there is yet another indicator of it: high oil tax. The Petroleum Planning and Analysis Cell (PPAC) data shows, the central government has collected ₹19.6 lakh crore from oil taxes from FY15 to Q1 of FY22. Of this, Excise and Cess alone amount to ₹17.4 lakh crore. During this period, the crude price (Brent) has fallen drastically. From over $100/barrel before FY15 (in FY12, FY13 and FY14), the crude price fell to annual average of $58.5 during FY15-FY21. In April and May 2021 (FY22), it has gone over $60/barrel.

How does the government justify high oil tax?

Finance Minister Nirmala Sitharaman said it was because of the “trickery” of the UPA government, which cut taxes but left huge oil bonds for the Modi government to pay. Truth is completely different and is linked to the massive corporate tax cut of ₹1.45 lakh crore that her government announced amidst fiscal resource crunch.

The UPA government had kept the oil prices low and balanced it by issuing oil bonds when the crude price was skyrocketing (the previous Vajpayee government also followed the same policy). Budget documents reveal that when the Modi government took over in May 2014 (FY15), the total outstanding on oil bonds stood at ₹1.3 lakh crore.

How much has the government paid off? It paid ₹3,500 crore in FY15 and ₹10,000 crore in FY22 towards the principal amount. Plus, it has paid interests of ₹9,989.86 crore every year, which amounts to ₹79,918.9 crore between FY15 and FY22. The total comes to ₹93,418.9 crore.

So, as against oil bond outgo of ₹93,418.9 crore until FY22, the government has already collected ₹19.6 lakh crore in oil tax until Q1 of FY22 – that is an excess of ₹18.6 lakh crore or 20 times more!

Why high oil tax is a burden on the poor?

The poor not only use more petrol and diesel, they are also burdened with inflation that high oil prices bring. This was revealed by a study conducted by the PPAC (through Nielsen) in 2014. The study showed (a) 99.6% of petrol is used by the transport sector, of which 61.4% petrol is consumed by two-wheelers and 2.3% by three-wheelers, as against 34.3% by cars (b) 13% diesel is consumed by agriculture and (c) 70% of diesel is consumed by the transport sector.

While the first is a direct burden on the poor, the second (agriculture) and third (transport sector) add to their cost of food and other essential items (transported) and travel (by bus and train).

To sum up, low corporate tax and low direct tax means the tax burden shifts to the poor as the government needs more resources for its fiscal spending. The pandemic has disproportionately hurt the poor by way of higher loss of lives, jobs and businesses and the impact is visible in low consumption demand in the economy. Going forward, a sluggish demand will continue to drag down growth. Therefore, it makes immense economic sense to reverse the regressive taxation regime in India, apart from other measures to tackle the systemic slowdown.