It is a sad commentary on experts when they allow their prejudices to dominate what they say.This holds true for their underestimations of GST revenues.
There is either a rumour or false news going around, and on a subject on which there should be no ambiguity — the magnitude of GST revenues over the last few months (and since its inception). This is an election year, and unfortunately every statistic gets blown out of proportion. Of course, we should also mention that this is the age not of Aquarius but Twitter and Cambridge Analytica — a deadly combination in the best of times. Now, you add election-year politics and you have a super-deadly concoction of false news.
The prevailing “conventional” wisdom is that the average three-month GST collection of 95 thousand crore (thcr) for the first three months of this fiscal year — April through June — is way below the Union Budget target of 112 thcr a month. We also know that the GST council has reduced tax rates on a large set of items. There is now official talk of eliminating the 28 per cent tax bracket for all but a few sinful items. The immediate response of the GST pessimists (co-incident with the political opposition?) is that this is an election jumla by the BJP to win middle class votes (the presumption is that these votes “rightfully” belong to the opposition).
Two finance ministers — of Punjab and Kerala — are on record as having “opposed” the middle-class GST tax cuts. Neither is a BJP chief minister and Mamata Banerjee has been uncharacteristically quiet. Nevertheless, the argument that GST is missing the annual budget target of Rs 112 thcr by about Rs 17 thcr each month lends some heavy “intellectual” weight to the arguments of the opposition. Then there was the following headline in a pink newspaper about GST revenues being short of the budget. “GST revenue shortfall: The Centre could be staring at a Rs 517 billion hole”, proclaimed one.
Senior Minister Arun Jaitley believes that these tax cuts would lead to a loss of Rs 70 thcr in this fiscal year. This seems close to the pink headline estimate of Rs 52 thcr, the other Rs 18 thcr presumably being lost on the state account. However, Jaitley’s estimate is notional, while the pink newspaper (and the opposition) believes it is the reality.
Then there are consequences of tax revenue loss. This is an election year, and starting from the MPC, to the rating agencies, to the newspapers, to the political opposition, to Twitter and finally to the aam aurat — all are concerned about the impact that fiscal slippage will have on the deficit, and interest rates and EMIs. Therefore, it is imperative that we obtain the right calculation of GST revenues relative to the budgeted amount. The nation wants to know, we all want to know.
The strikingly good news is that despite the tax cuts, GST tax revenues are very much on track and that instead of a deficit, the nation is looking at saving, at a minimum, all of the compensation cess budgeted, that is at least Rs 90 thcr, or 0.5 per cent of the GDP, will accrue to the consolidated state plus Centre account. The combined fiscal deficit of the Centre and states for FY19 is 5.9 per cent of the GDP — 3.3 per cent for the Centre and 2.6 per cent for the states. A saving of 0.5 per cent of the GDP would imply a combined deficit of 5.4 per cent of the GDP. The lowest combined deficit recorded (IMF data), ever, was the 5 per cent achieved in the bumper pre-crisis year of 2007/8. Further, the last three fiscal years (2016/17, 2017/18 and 2018/19) are the lowest (after 2007). And the lowest among these will happen in a national election year.
But this is getting ahead of the story. We need to establish the veracity of this conclusion, which will mean establishing the fake news in the media. This will involve some numbers and simple accounting — only the interested reader (and accountants) should proceed beyond this point.
First, the genesis of the Rs 112 thcr a month target. The Union Budget states the following GST revenues for FY19: Centre or CGST — 604 thcr, integrated or IGST 50 thcr; cess 90 thcr. Making the common (but wrong) assumption that GST collected at the state level, SGST, is equal to CGST, one arrives at the following estimate of GST calculations for FY19: Total is equal to CGST*2 + IGST + cess, or Rs 1348 thcr. For 12 months, that is an average of Rs 112.3 or Rs 112 thcr.
There are two terrible mistakes in this calculation. First, SGST has not been equal to CGST for any month till date. At some future date, once the dust settles, they will be equal, but not now. An estimate of SGST for FY19 is provided by the RBI in its study of state finances — Rs. 488 thcr. The second “error” — and both the MoF and the RBI share blame for not highlighting this — is that the FY19 estimate, only for GST, is based on revenue collection for 13 months!
Think about it: The GST revenue estimate for FY18 was for 8 months. If FY19 is for 12 months, then where does the April 2018 GST revenue of Rs. 103 thcr go?
Now let us do the calculations of FY19 GST revenues on a 13-month basis. Total collection is Rs 1,232 thcr estimated as: CGST 604 + SGST 488 + IGST 50 + cess 90. This divided by 13 yields an average estimate of Rs 94.8 or Rs 95 thcr a month. Average per month collection April-June 2018 is Rs 95.4 thcr.
Remember the controversy that erupted after the Union Budget was presented on February 1? Many experts (especially politicians) had estimated that the BJP had presented an election year budget, with the added refrain that there was no difference between the UPA and NDA except the presence of a cow. By making this comparison, we have on record that the UPA stalwarts at least admit to the possibility that the Congress-led UPA was fiscally irresponsible.
Remember the brouhaha over the Centre not achieving the stated fiscal target of 3.3 per cent, and reporting an excessive 3.5 per cent? Bond yields rose, the government had to pay more for its borrowing, and fiscal and monetary exerts pronounced the death of fiscal responsibility. The MPC warned of fiscal slippages being inflationary. None of the experts bothered to point out, let alone emphasise, that the slippage in the fiscal deficit was due to the technicality of an 8 rather than 9-month GST estimate. CEA Arvind Subramaniam recently stated that only Rs 5 thcr of the Rs 61 thcr budgeted in FY18 cess was actually used. When the dust settles, the actual fiscal deficit at the Centre will be less than the original 3.3 per cent budgeted for FY18. At a minimum, the consolidated Centre plus state deficit for FY18 would be about 0.5 per cent of the GDP less than now assumed by the rating agencies, and other experts.
Even with zero acceleration in revenue growth the cess of Rs 90 thcr will be saved in FY19. For the first two months, April and May 2018, a total of only Rs 4 thcr compensation cess was distributed, and this should go down to zero pretty soon. What all this means is that more GST tax cuts will be forthcoming — indeed, should be forthcoming.
What the “excess” GST revenue in FY19 (and some from FY18) means is that some money is available for some additional expenditures by the Centre and/or state governments — money towards MSP increases, and money towards the beginning of healthcare for the poor. And without causing a flutter among the fiscal fundamentalists of which India seems to have more than its fair share.