Above: Akhil Bharatiya Udyog Vyapar Mandal activists protesting against GST in Lucknow/Photo: UNI
In a seemingly worrying development, there has been a drop in compliance rate and a revenue shortfall. But going by international experience, these issues could get sorted within two years
By Sumit Dutt Majumder
After one and a half years of GST implementation, policymakers are grappling with two important issues. The first is a drop in compliance rate of tax filers and the second is a substantial fall in GST revenue collection; both are interconnected to a great extent.
Union Minister of State for Finance Shiv Pratap Shukla, in response to a question raised in the Lok Sabha, recently said that the percentage of taxpayers who had not filed returns associated with payment of GST has steadily increased from 10.56 percent in November 2017 to over 28 percent in November 2018. The data further showed that under the composition scheme where traders, manufacturers, and the like pay a nominal tax annually based on turnover and where the compliance procedure is simple, the percentage of non-filers has risen to 25.37 percent in July-September 2018 as against 15.03 percent in the corresponding period of 2017.
One of the basic objectives of the introduction of GST was to keep the compliance burden simple and tax rates moderate, thus ensuring voluntary disclosure by taxpayers. This was expected to lead to a larger tax base, which in turn was to give the tax buoyancy. However, that has not happened as evident from the data above.
Let us first try to understand the issue of missing taxpayers, i.e., taxpayers who have stopped filing tax returns. The obvious reason for the drop in filing returns is non-payment of tax. When GST was hurriedly implemented on July 1, 2017, there were many flaws, including GSTN, the IT infrastructure, which was not fully in place and beset with many glitches.
One clause stated that inter-state suppliers of goods and services would not be entitled to any threshold exemption. This meant that a supplier of goods and/or services based in Okhla in Delhi would have to pay GST, even if his turnover was below the threshold, the moment he supplied to a purchaser in Gurgaon in Haryana or Noida in Uttar Pradesh. There was another clause relating to reverse charge mechanism. If a registered taxpayer purchased goods and/or services from an unregistered supplier whose turnover was below the threshold and hence did not need to be registered, the former would be in a soup. Either he would have to pay the GST and file returns on behalf of the unregistered supplier, or ask the latter to get registered even though his turnover was below the threshold.
In order not to lose business, some unregistered suppliers of goods and/or services got themselves registered and paid GST although their turnover was below the threshold. These two clauses coupled with a very low threshold disrupted small businesses. This, in turn, led to the closure of many small establishments and consequent unemployment.
Realising the far-reaching fallout of going overboard in formalising the informal sector of small business, the GST Council relaxed the compliance burden a few months later. First, the clause regarding disentitlement of threshold benefit for inter-state suppliers of services (not goods) was kept in abeyance. Second, the clause relating to reverse charge mechanism was also kept in abeyance. Consequently, a substantial number of suppliers of goods and services, who had got themselves registered and paid GST in the initial months because of these two clauses, got themselves unregistered and stopped paying GST and filing returns.
It is not clear whether this important aspect has been factored in while determining the percentage drop in compliance rate of tax filers. If not, the percentage drop will have to be recalculated. In either case, one will have to act on the compliance shortfall, whatever may be the number.
It is not difficult to identify the traders who were registered but were not filing returns. Thereafter, leaving aside the traders who have stopped paying tax for legitimate reasons as explained above, GST officers can proceed against other registrants who have not been paying tax and filing returns.
GST is based on the principle of trusting and facilitating trade, while simultaneously taking stern action against those who are non-compliant. There are elaborate enforcement provisions such as search, seizure, arrest, etc, under GST laws. The structure of GST is such that not many officers are now necessary for the basic assessment work as it follows the principle of self-assessment. The main responsibility of officers is now in the areas of scrutiny of returns, including detection of non-filing, selective audit based on risk factors and collection of intelligence, detection of cases of non-compliance and follow-up enforcement action.
In fact, in his written reply to Parliament, the minister stated: “The details of the non-filers of returns are regularly shared with the jurisdictional tax authorities, and measures including inspection, visit of premises, search and seizure are being undertaken wherever required.” It has also been disclosed that 499 cases of fake invoices used for claiming input tax credit that involved tax evasion of Rs 3,894.94 crore were detected in this fiscal up to December 2018. Fake invoices were generated without any actual supply of goods and/or services just to utilise the credits that were facilitated by them. This current amount of tax evasion (Rs 3,894.94 crore) shows a marked increase in detection of such cases, as from July 2017 to March 2018, only four cases were detected involving Rs 9.75 crore.
This brings one to the issue of GST revenue shortfall. The current collection is substantially below the budgeted target. As per a report by Kotak Institutional Equities, the present run rate of GST collection, after adjusting for refunds, works out to around Rs 89,600 crore as against a monthly target of Rs 1,04,400 crore. The government has collected Rs 8,71,043 crore as GST during the first nine months of this FY i.e. April-December 2018. In order to reach the overall annual target of Rs 13.48 lakh crore, the government will have to collect Rs 4.77 lakh crore in the next three months. This seems impossible.
One of the three main reasons for this shortfall is a series of GST rate cuts carried out in five rounds from the later months of 2017 till December 2018. At the time of introduction of GST in July 2017, as many as 123 items were in the highest GST slab of 28 percent. After realising the hardship being faced by trade and industry, the GST rates on many items were reduced in different stages, and by the end of December 2018, only 28 items were in this highest slab. A similar situation arose in respect of other slabs as well, resulting in revenue shortfall. The second reason for the shortfall is the low compliance rate in payment of taxes. The third is the considerable slowdown in the economy, particularly in the manufacturing and service sectors. This impacted revenue collection adversely. Thus, the government has enough reasons to be anxious about the shortfall in revenue collection.
There is another challenge before the government. This is an election year and political compulsions dictate that it should not be seen as taxing people more. In fact, people’s expectations are for more tax cuts and more facilities for reduced burden of tax compliance.
There are expectations that some additional items such as cement, air conditioners, etc, will be taken out of the 28 percent slab. The justifiable demands from small businesses are for increasing the threshold amount from Rs 20 lakh to at least Rs 50 lakh and removing the restrictions on inter-state supply of goods.
Responding to some of the demands, the GST Council in its latest meeting on January 10 took a few corrective steps, particularly in respect of small businesses. The GST threshold will now be doubled to Rs 40 lakh, composition scheme threshold increased from Rs 1 crore to Rs 1.5 crore and the scheme extended to services too for units having a turnover upto Rs 50 lakh. These conditions will be applicable from the next fiscal. They will give great relief to small businesses but also adversely impact GST revenue. Reportedly, the decisions on composition scheme alone will reduce the revenue by around Rs 3,000 crore in the next fiscal.
Identifying missing taxpayers and stricter enforcement will, no doubt, add to the revenue, but that won’t be enough to meet the overall GST target in the next three months. We are heading towards interesting times on this front. One must also remember that international experience suggests that revenue collection generally stabilises after around two years of introduction of GST. So, there is no reason to be too worried. Judicious steps taken after the election season ends should help GST stabilise in all respects.
—The author is former Chairman, Central Board of Excise & Customs, and author of three books on GST