The implementation of what has been touted as the boldest tax reform since independence, the Goods and Services Tax (GST), has not been all that smooth. The GST regime has been facing many bumps, such as inadequate collections compared to the target set out initially, non-compliance by stakeholders and frequent changes in slabs leading to a revenue shortfall. According to recent reports, the government will take a ‘pause’ in further rate cuts. This has come even when the shortfall each month between the target and actual collection has begun narrowing since the beginning of fiscal 2019.
Remember, the GST Council recently lowered rates on close to 100 products including smaller TVs, refrigerators and washing machines, sanitary napkins and handicraft products. Since the GST regime was first implemented in July last year, rates on 384 products have been reduced but not a single product has seen any rate hike. Lowering rates obviously reduces overall GST collections, at least in the short term.
A Facebook post by Arun Jaitley, who oversaw the implementation of the GST regime, points out how a large number of items, which were earlier in the highest 28% slab, have been gradually brought to lower tax slabs. Jaitley said the 28% tax slab is being phased out as the bulk of the remaining items in this category are only “luxury items or sin goods.” Other items outside the luxury–sin goods category are cement, air-conditioners, large screen televisions and a handful of others. “Hopefully, with further expansion of revenues, these few items may also witness a change of category,” he said.
Revenue expansion under GST is happening albeit slowly. However, unnamed government officials were quoted as saying that a “worrying” shortfall in collections has pushed the government to pause further rate cuts. As per data presented last month, provisional collections in the first quarter of this fiscal under GST stood at Rs 2.92 lakh crore against a monthly target of Rs 1-1.2 lakh crore. That works out to a shortfall of close to Rs 40,000 crore in three months or close to Rs 13,000 crore each month.
Between August 2017 and March this year, the total collections stood at Rs 7,19,078 crore or an average of Rs 89,885 crore. It is obvious that though the shortfall continues, it has been narrowing.
Sachin Menon, partner and national head (Indirect Tax) at KPMG told DNA Money that last month GST collections stood at Rs 96,000 crore, short of the monthly target by just Rs 4000 crore. “As compliance improves, such minor deficiencies will disappear”. Menon also said that it made sense to “wait and watch the trend before the next rate cut”.
So why do GST collections continue to fall short of the target?
Non-compliance could one reason. This reply in Lok Sabha as on June 30 this year shows that 1,205 cases of GST evasion were reported by central tax authorities across the country and the total amount detected was Rs 3,026.55 crore.
Besides, as Jaitley says in his post, tariff rationalisation depends on the expansion of the revenue base. “In the pre-GST regime, India had a complicated, inefficient, multiple indirect tax system where each assessee could be levied up to 17 different taxes. The GST consolidated them to one tax. Since the passing of GST Constitutional Amendment Bill, there have been twenty-eight meetings of the GST Council which have reviewed the GST tariffs on a continuous basis. Obviously, the tariff rationalisation depends on the expansion of the revenue base. The first one year has witnessed an encouraging trend in this direction.”
Abhishek Jain, tax partner at EY, says “A gradual uptick in GST revenue collections this year has encouraged the government to further rationalise the GST rates. Hope this leads to buoyancy in the economy and the GST revenue collections remain robust”.
The net revenue loss to the government on account of the reduction of tax on goods and services has been about Rs 70,000 crore till now, Jaitley goes on to say. And since state governments have been guaranteed a 14% increase over their pre-GST revenues for the first five years, this burden has entirely been borne by the Centre. So, is it any wonder that the Centre is now seeking a pause in a further reduction in GST rates?
Remember, wider the gap between the target and actual collections under GST, the more difficult it will become for the Centre to remain committed to its fiscal deficit target of 3.3% of GDP for this fiscal. As per this reply in Lok Sabha, the budgeted target for fiscal deficit stands at Rs 624,276 crore for 2018-19. As on May 30, fiscal deficit stood at Rs 345,493 crore, which works out to 55% or more than half the target for the entire year in just two months of the fiscal.