India’s GST collections are below potential: IMF team

Multiple rates, exemptions and implementation challenges are affecting goods and services tax (GST) collections in India.

The study of India’s resource mobilisation for next five years has estimated that in 2018-19, GST collections were 5.8% of GDP.

This figure is far below the potential of 8.2% of GDP, indicating that the efficiency gains from the new regime have not fully accrued.

The IMF team has estimated that the compliance gap may be of the order of 40%.

The team included Ruud de Mooij, Arbind Modi, Li Liu, Dinar Prihardini, and Juan Carlos Benitez.

While it blamed multiple factors for the divergence between actual collections and potential revenue...

...the assessment flagged exemptions such as those on food articles as an area of concern.

Exemptions for food products alone are estimated to cost up to 0.4% of GDP.

It suggested that the government could look at a direct benefit transfer for the bottom of the pyramid segments to tackle this issue.

A committee pointed out that the exemptions available to food products were being misused.

The segments such as basmati rice companies had sought to deregister their brands to avoid paying taxes.

The IMF team has also said that other design flaws reduced the revenue potential and the incentive for compliance.

Besides, some of the issues created economic distortions, including refund problems.

While there are four slabs — 5%, 12%, 18% and 28% — there are other rates for bullion that are adding to the complexity.

It has also pointed to the debate about implementation challenges such as e-filing or returns are cumbersome and increase the compliance cost.

The last meeting of the GST Council rejected the demand for a rate revision.

The multiple flaws of the system impact the whole GST chain.