The Centre and States must introspect as to why despite the regime being in place for over two years, the desired buoyancy in tax revenue has not been achieved
A major reason for the delay in taking up the Constitutional Amendment Bill for enactment of the Goods and Services Tax (GST) was the reluctance of the then United Progressive Alliance (UPA) Government at the Centre to agree to the demand of the States. The latter wanted compensation of the loss of revenue that would arise with its launch vis-à-vis the revenue they would get under the subsisting dispensation of excise duty, sales tax or value-added tax plus a host of other local taxes. This hesitancy came although the concept was first introduced by then Finance Minister P Chidambaram in his Budget speech on February 28, 2006 with an ambitious launch target of April 1, 2010.
The Narendra Modi Government, by agreeing to this demand achieved a fair degree of success in building consensus among all the States. Within two years of taking charge in 2014, it was able to steer through the Constitutional Amendment Bill (in August-September, 2016) leading to its launch from July 1, 2017. The GST Compensation Act (2017) was passed to provide for compensation for five years, till 2021-22, to be calculated as the difference between actual collection and the revenue they would have got with growth at 14 per cent over the 2015-16 level.
Being an uncharted territory and the Centre not confident that under the GST scheme of things, it would be able to generate enough surplus to pay for the shortfall faced by States, it also passed an amendment to the GST Compensation Act (2018) to levy a cess on the supply of certain goods and services. The cess is levied on demerit goods (those which fall in the 28 per cent tax slab) such as automobiles, tobacco, drinks and so on with a proviso to use the proceeds for compensating the States who face shortfall. The cess was to remain in force for five years.
The rationale behind withdrawing this levy on completion of five years is that by this time, meaning 2021-22, the GST dispensation would have become buoyant enough to yield sufficient resources for the States to meet their budgetary requirements within prudential limits set under the Fiscal Responsibility and Budget Management Act (FRBMA), thereby obviating the necessity of compensation.
There are still three years to go before the deadline; yet, they have raised a demand for continuing this for five more years. Already, they have made a submission to the 15th Finance Commission in this regard. This is not unusual as the States are prone to looking for a safe harbour perennially.
However, the big worry is the subdued collections, a trend which shows no sign of abatement. Apart from overall growth in tax collections under GST being less than five per cent against the target of 12 per cent, even the proceeds from cess, which are meant to be utilised for compensating the States for the shortfall, are trailing far behind.
During April-August, 2019 against the requirement of Rs 65,000 crore (at the rate of Rs 13,000 crore a month), the actual collection was only Rs 41,000 crore (or about Rs 8,000 crore a month) leaving a shortfall of Rs 24,000 crore. To make up for this, the collections in the remaining seven months of the year will have to be at the rate of Rs 16,500 crore a month, which is nearly impossible to achieve in view of the current nominal GDP growth.
Even as the shortfall persists, being a constitutional obligation, the Centre will have to pay compensation to the States from out of its own kitty which by itself is dwindling, courtesy declining collection of both indirect as well as direct tax. This in turn, will lead to huge slippage in the fiscal deficit target of 3.3 per cent already threatening to go out of control due to a spate of expenditure-raising and revenue-forgoing commitments made by Finance Minister Nirmala Sitharaman (the mother of all being a steep cut in the corporate tax rate).
Both the Centre and the State Governments need to seriously introspect as to why despite the GST regime being in place for more than two years, the desired buoyancy in tax revenue has not been achieved. An overarching objective behind launching this transformative reform — an epitome of “one nation, one tax” — was to increase revenue manifold by boosting the GDP growth on the one hand and bringing millions — hitherto evading the taxman — under the tax net on the other. On both counts, the performance has been far below expectations.
On curbing evasion and widening the tax net, the situation is far more serious than initially thought. It seems dubious businessmen and traders are having a heyday. According to a statement by Minister of State for Finance, Anurag Thakur, in reply to a question in the Rajya Sabha, loss to the exchequer due to frauds under GST (including bogus claims of input tax credit) was about Rs 45,500 crore since the rollout of the tax reform on July 1, 2017. According to the West Bengal Finance Minister Amit Mitra, this could even touch the Rs 100,000 crore mark.
At present, the number of entities registered under the GST is about 12 million. This is five million more than the registered entities under the erstwhile dispensation prior to July 1, 2017.
There is an apprehension that a slice of the increase could be fake entities which were set up only to perpetrate fraud. It shows the extent of rot in the system as without connivance of officials in the department, fraudulent claims of this magnitude won’t be possible.
No wonder then, the actual collection under GST has been hovering around Rs 100,000 crore a month (in some months, for instance, August, 2019 it is even less) whereas the Government should be aiming at a minimum of Rs 150,000 crore a month (assuming tax to GDP ratio at the rate of ten per cent).
To get there, it should undertake complete overhauling of the administrative machinery to prevent frauds and plug leakages (mere sacking of a few commissioners here and there won’t do the job). The Prime Minister’s zero tolerance for corruption should get reflected in credible action and concrete results on this most crucial front.
Apart from enabling smooth transition to a scenario of no compensation beyond 2021-22 and modest tax rates (we should be aiming to abolish the 28 per cent slab altogether and merging 12 per cent and 18 per cent into a single say 15 per cent), this is crucial from yet another angle.
At present, petroleum products like crude oil, gas, Aviation Turbine Fuel (ATF), petrol and diesel have been kept out of the purview of the GST. This is because both the Centre and States get maximum tax revenue from these products, which will be severely impacted if they are brought under the GST regime (this will happen even if these are put under the highest tax slab of 28 per cent, which is significantly lower than the current incidence of over 50 per cent under the existing dispensation).
However, the economy is paying a heavy price as continued exclusion of these products from the GST results in sharp increase in their prices due to the sheer cascading effect of excise duty and value added tax.
This can be avoided if GST acquires the robustness and the resilience needed to yield the desired revenue which in turn, will help in persuading State Governments to agree to their inclusion.
How will Team Modi make it happen? One can only guess.
(The writer is a New Delhi-based policy analyst)
