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GST: Revenue Blues

GST: Revenue Blues
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Above: A GST Council meeting. The finance minister has promised a better form of GST/Photo:

The new tax regime has had its share of glitches, leading to a fallout on consumers and states. A 12-member panel has now been formed to suggest reforms and relevant changes

By Sumit Dutt Majumdar

Hiccups have assailed the Goods and Sales Tax (GST) regime from the beginning. And when people from the industry, chartered accountants, cost accountants, company secretaries and other stakeholders in the financial sector met Nirmala Sitharaman, the Union finance minister, recently, she told them: “We can’t just damn it. It has been passed by the Parliament. It has been passed in all state assemblies. It might have flaws. It might give you difficulties. But, I am sorry; it is a ‘kanoon’ of the country. I would appeal to you all to work together to make sure we have a better frame.”

Her statement is significant in many ways. First, she is right when she says that one cannot damn a new taxation system like GST that has been approved almost unanimously by Parliament and all the states. This has been a unique example of co-operative federalism where both the centre and the 31 states decided matters unanimously without having to resort to voting.

Secondly, she is not in denial mode. She has acknowledged that there may have been flaws in GST and promised to have a better form of GST and sought the views of the industry and professionals to this end. Yes, there were certain glitches such as its introduction without getting GSTN, the IT infrastructure, fully operational. Two more months would have made GSTN ready before introducing GST.

There were certain policy glitches too. In the government’s earnestness to get almost all of the informal economy transformed into a formal one, the threshold for payment of GST was kept very low—at Rs 20 lakh as against the international standard of Rs 80 lakh to Rs 1 crore. Another policy restriction—the moment small business made “interstate supply” of goods and/or services, they forfeited the threshold benefit. So, many small businesses stopped interstate supply and their business shrank. This restriction remains in respect of goods. Another policy glitch was charging GST from the recipient by imposition of reverse charge mechanism on transactions with unregistered small business suppliers. The result was that the GST payer stopped dealings with small business. Coming on the heels of demonetisation, a large number of such businesses closed. Given that small business contributes at least around 70 percent of the total employment in the country, this resulted in huge unemployment.

Then, too, many items, around 270, were kept in the highest slab of duty that was originally meant for “demerit goods”. Most of these items were not de-merit goods. Demerit goods are alcohol (which is not under GST now), cigarettes, tobacco, diesel and other petroleum products and fizzy cola drinks, all harmful in various ways. Internationally, de­merit goods are put in the highest tax slab ostensibly to reduce consumption.

Also, the number of returns was too many and too complicated. The knee-jerk reaction after the collapse of GSTN led to a return system that was too simple with many loopholes. This led to tax evasion, particularly fraudulent availment of transition credits, i.e. credits of pre-GST taxes. However, once the flaws were recognised, the GST Council took immediate corrective action. In fact, implementation of GST has to be considered as “work in progress” for some more time.


The third significant aspect of Sitharaman’s statement is that she has promised to have a better form of GST soon. Now the root cause of concern is GST revenue shortfall. In August 2019, GST revenue stood at Rs 98,902 crore which was the lowest in the 2019-20 fiscal. In September, GST revenue dipped further to Rs 91,916 crore, a 19-month low after the lowest collection of Rs 85,962 crore in February 2018. Further, the September GST revenue declined by 2.67 percent as compared to the collections in September last year.

However, during April-September this fiscal, the collections grew 4.90 percent, year-on-year basis. That was because the collections were good in the initial months of this fiscal. The main reasons for such a decline can be traced to two important factors—economic slowdown and tax evasion.

First, the substantial decline in overall economic activity has led to less consumption and a “demand” crisis, and that again led to a decline in “supply”. Not to forget that GST is a tax on “supply of goods” and “supply of services”. Therefore, when the “supply” declines, the tax on it also declines. Being a transaction tax, any decline in economic activity impacts GST collections.

The lower GST collections also reflect lower GDP growth. Several indicators of sales, including those of automobiles and FMCG had shown a sharp dip from the beginning of the second quarter. It was, therefore, expected that

GST collections would be lower from August onwards than in the months of the current fiscal. That consumption declined is also evident from the fact that in the first quarter of 2019-20, private consumption grew by a meagre 3.1 percent, down from 7.2 percent in the previous quarter.

It must be remembered that the collections in September pertain to the supply of goods (read sale of goods) and supply of services (read providing of services) in the previous month of August. With demand remaining sluggish in September, a recovery in GST collections in October also seems unlikely.

Another worrisome factor is that the collections reported in September are much below the budget estimate of Rs 1 lakh crore per month. According to some estimates, the monthly run-rate for GST collections has already jumped to around Rs 1.18 lakh crore for the rest of the fiscal. With consumption remaining sluggish, meeting the target will be challenging.

Further, such a fall in GST collection will hurt the finances of both the centre and the states. First, the revenue collected through the compensation cess which is meant for transferring to the states may not be enough. So states may not receive the amount needed for compensation of their revenue loss. There may also be delayed and inadequate compensation.

Also, due to subdued revenue collections in other taxes also, the divisible tax pool, 42 percent of which is shared with states, will be lower than what was budgeted for. This will reduce the tax devolution amount for states. Further, devolution was carried out last year on the basis of the revised revenue estimates of 2018-19 presented in the budget. But, according to the Controller General of Accounts, actual tax collections were much lower. It means that last year, the devolution to states may have been higher than what was required. If the centre insists on adjustment of this overpayment in the current fiscal, that will further reduce the tax devolution amount for states.

The impact of lower revenue collections by states on their budget forecasts has also been commented upon in the Reserve Bank of India Study of State Budgets 2019-20, released recently. It noted that the unrealistic revenue forecasts in budget estimates would leave states with no option other than expenditure compression, even for the most productive and employment-generating heads. This will be unfortunate. The report also noted that states would be confronted with low tax buoyancies, shrinking revenue autonomy under the GST framework and unpredictability associated with transfers of Integrated GST (IGST) share of states.

The second reason for the decline in GST collections is tax evasion. It appears that in the first year of implementation, the entire GST machinery was geared towards its successful launch and removal of glitches. It is but natural that in the initial stages, emphasis was on getting the new tax system accepted by trade, industry and other taxpayers; compliance issues did not attract much attention of the taxmen.

But tax evaders took advantage of the loopholes and resorted to huge tax evasion. This became evident from the detection of a number of cases of fraudulent availment of credit, fake invoices without any supply, surreptitious removal of goods without payment of GST, etc.

These detections started from the second year of GST implementation. The Directorate of GST Intelligence for both the centre and states will have to be strengthened and they should have excellent coordination.

Through a set of new rules on October 11, 2019, the government has capped the input tax credit for the recipient at 20 percent of the total credit, pending the payment of full GST by the supplier. The idea was to force taxpayers to get their suppliers to upload their invoices after full payment of GST so that they could claim the balance credit.

In light of the uncomfortable revenue situation, the GST Council recently formed a 12-member panel with officials from Maharashtra, Tamil Nadu, Uttar Pradesh, West Bengal, Punjab, the centre and GSTN. The panel has been asked to suggest measures to augment GST revenue; it will also look into a wide range of reforms including improving compliance, clamping down on misuse, systemic changes in GST that will also cover anti-evasion measures using better data analytics and better administrative coordination. It will look into policy measures and relevant changes needed in the law and measures for expansion of the tax base under the GST regime.

All the subjects and issues on which the panel has to make recommendations are relevant and the government can expect to be benefited by its recommendations. However, it has to give its report within 15 days. That is too short a time for such a vast canvas of issues.

—The writer is former chairman, Central Board of Excise & Customs, and author of the book GST—explained for Common Man

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