Prof D Mukherjee
The Goods and Services Tax (GST) is vital to India’s economy, reflecting trends in consumption, industry, and market activity. December 2024 saw a decline in GST collections, raising concerns about a potential economic slowdown. This issue gains urgency as it coincides with the upcoming 2025-2026 budget, which will shape economic recovery. Significant revenue drops in states like Arunachal Pradesh and Meghalaya highlight regional disparities, while strong performances in Sikkim and Punjab indicate resilience. This write delves into the tentative causes behind the GST decline, its economic implications, and strategies for reviving growth through effective fiscal policy. To be specific, for instance, decline in GST revenue collection in December 2024 in the states such as Arunachal by 24%, Meghalaya-12%, Andhra Pradesh by 6%, and Puducherry at 2% indicating a regional contraction in economic activity, likely linked to reduced consumer spending and industrial sluggishness. Conversely, rise in collection in Sikkim by 32%, Haryana -28% and Punjab by 22% outperformed others, showcasing robust consumption and tax compliance. However, in populous states like Uttar Pradesh, Bihar, West Bengal, and Madhya Pradesh, the rise in GST collections remained modest at less than 5%, reflecting limited economic buoyancy despite their large consumer bases.
While exploring the underlying factors for decline in recent GST collection, one of the prominent factors driving the drop in GST collection stranspired is weakened consumer purchasing power. Stagnant wages, coupled with inflation eating into disposable incomes, have pushed households to cut discretionary spending. This trend has worsened in 2024 due to global economic uncertainties, supply chain disruptions, and soaring energy costs. Rural demand, a substantial component of India’s consumer market, remains subdued due to low agricultural incomes and inconsistent monsoons, further affecting the consumption of goods and services. Consequently, reduced spending leads to slower business growth, forcing companies to scale back production and freeze wages, creating a feedback loop of reduced GST revenue and increased welfare demands on the Government. While seasonal fluctuations in economic cycles are normal, December 2024 saw an atypical slump in GST collections.
Typically, November’s festive season drives consumption, which tapers off in December. However, this year, the drop exceeded expectations. Exhausted disposable incomes following festive spending and deferred non-essential purchases compounded the decline. Businesses, meanwhile, scaled back supply through year-end inventory adjustments. Additionally, elevated interest rates discouraged borrowing, reducing consumption further. These factors emphasize the importance of stabilizing consumer demand through long-term policies rather than relying on seasonal spikes. Further, the industrial sector’s struggles have also contributed to the decline in GST revenue. Small and medium enterprises (SMEs), still recovering from past disruptions like the COVID-19 pandemic, face rising raw material costs and energy prices, leading to reduced production. Supply chain bottlenecks and logistical delays, particularly for export-driven industries, exacerbate inefficiencies. Surveys indicate that production in several SMEs fell by 20-30% in late 2024, translating into fewer taxable goods. This supply-demand mismatch, worsened by reduced consumer spending, highlights the need for targeted policies to revitalize industrial output and GST collections. Besides, India’s intricate GST system and high tax rates hinder optimal collection. Businesses, particularly smaller ones, struggle with compliance due to burdensome procedures like monthly filings and invoice reconciliations. High tax slabs on essential goods discourage consumption, while tax evasion remains a significant problem, costing the government up to 20% of potential revenue. Simplifying the GST framework, reducing rates for essentials, and leveraging technology to curb evasion can address these persistent issues and enhance revenue sustainability.
Under the given circumstances, researchers suggest certain general Policy recommendations for consideration by the policy makers and macro economy managers and reduction in GST Rates for enhancing affordability and demand comes first and foremost issue as it is a critical measure to revitalize consumer spending. High tax slabs on essential and semi-essential goods discourage lower-income consumers from making purchases. Targeted rate cuts for such items can improve affordability and drive consumption. Historical examples demonstrate that reduced rates on consumer durables boosted sales and eventually offset initial revenue losses through increased transaction volumes. Lower taxes also ease the cost burden on businesses, enabling them to pass savings on to consumers. Similarly, rationalizing GST rates for key sectors like hospitality, real estate, and SMEs can accelerate their recovery, fostering economic growth and expanding the tax base. Next may come into the view for formulating revival packages for SMEs to bolstering economic foundations.
SMEs, a cornerstone of India’s GDP and GST revenues, face acute challenges such as high costs, restricted credit, and market constraints. Tailored revival packages, including tax incentives, energy subsidies, and simplified compliance procedures, can rejuvenate this sector. Access to affordable financing through low-interest loans and credit guarantees can provide crucial liquidity for expansion. Digitalization initiatives can further aid SMEs in adhering to GST norms effectively. Supporting SMEs not only strengthens GST collections but also promotes employment and economic stability. Besides, case to case basis targeted subsidies for boosting up consumer confidence may yield the desired results. Targeted subsidies can alleviate financial strain on lower-income households, boosting their purchasing power. Subsidies on essentials like food, fuel, and electricity allow families to allocate more income toward other goods, enhancing consumption and GST revenue.
Direct Benefit Transfer (DBT) mechanisms ensure efficient subsidy delivery, minimizing leakages. Strengthening rural consumption through farmer-focused schemes such as subsidized inputs and price guarantees can further invigorate demand. Integrating these measures with long-term skill development ensures sustained economic resilience and recovery. Further, improving tax compliance simplification and ease of enforcement is sine qua non for rejuvenation of GST administration. Simplified compliance processes, such as consolidated GST forms and pre-filled returns, can reduce the burden on small businesses and encourage adherence. Advanced technologies like AI and block chain can detect evasion and enhance transactional transparency, as evidenced by a pilot program yielding a 15% compliance increase. Public awareness campaigns can foster voluntary compliance, while stricter penalties for evasion coupled with incentives for compliance can bridge gaps. These efforts can lead to a robust tax ecosystem, driving consistent revenue growth.
February 2025 is nearing and certain tentative recommendation for consideration while preparing the Federal Budget 2025-2026 by Ministry of Finance (MOF), Government of India (GOI) under the backdrop of December 2024- economy’s performance becomes an imperative and at the outset, tax reforms enabling simplification for equitable growth becomes significant as the upcoming budget offers an opportunity for impactful tax reforms. Simplifying GST by merging tax slabs can enhance transparency and usability. Rationalizing rates, especially for essentials, can increase affordability and consumption, ultimately driving revenue. Introducing tiered taxation for luxury and necessity items ensures fairness while preserving revenue neutrality. Lower GST rates for MSMEs and sectors like healthcare, education, and agriculture can alleviate financial pressure on producers and consumers. Revising income tax slabs to provide relief for lower-income groups could boost disposable income, spurring consumption. Coupled with enhanced anti-evasion measures and digitization, these reforms will strengthen the tax system and foster sustainable growth. Next comes in the row is the context of infrastructure investments to bridging regional imbalances. Infrastructure development should be central to the 2025-2026 budget. Prioritizing areas like Arunachal Pradesh and Meghalaya, which experienced sharp GST collection declines, can address regional imbalances. Investing in roads, railways, and digital infrastructure stimulates local economic activities. Allocating funds to special economic zones (SEZs) and green energy projects promotes sustainable growth and job creation. Infrastructure investments drive demand for materials and labour, creating a multiplier effect on the economy. Ensuring timely project execution will deliver immediate economic benefits and contribute to long-term revenue enhancement.
Further, boosting consumers’ confidence by addressing inflation and supporting effective demand becomes an utmost urgency. Strengthening consumer confidence is vital for economic recovery. Allocating subsidies for essentials like food, fuel, and fertilizers can ease household financial strain, increasing discretionary spending. Expanding programs like MGNREGA ensures rural income stability, while urban initiatives like affordable housing stimulate demand in cities. Direct benefit transfers (DBTs) through schemes like PMJDY inject liquidity into households, enhancing consumption. Combining these measures with inflation-targeting monetary policies can stabilize purchasing power, driving sustained demand and higher GST collections. Besides, fiscal prudence with growth orientation to balancing priorities deserves considerable attention of the policy makers. The budget must balance growth initiatives with fiscal discipline. Reducing non-essential expenditures and optimizing government schemes can free resources for critical sectors. Public-private partnerships (PPPs) and green bonds offer innovative financing options for large projects. Improving tax compliance rather than increasing rates ensures a steady revenue flow without overburdening stakeholders. This pragmatic approach promotes robust economic growth while maintaining macroeconomic stability, ensuring India’s resilience and prosperity in 2025 and beyond.
The decline in GST collections in December 2024 highlights key economic challenges such as weakened consumer purchasing power, industrial slowdowns, and tax compliance issues. Addressing these concerns through targeted tax reforms, infrastructure investments, and consumer welfare programs can stimulate growth. The 2025-2026 federal budget presents an opportunity to balance fiscal prudence with growth initiatives, restoring consumer confidence and industrial output while tackling regional disparities. A pragmatic, inclusive approach will ensure sustained economic recovery and long-term growth for India.
(The author is an Educationist, a Management Scientist and an Independent Researcher)
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