The Goods and Services Tax (GST), the most important tax reform in India, is two years old today. Most goods and services are now taxed at a uniform rate across the country under GST, replacing a multiplicity of tax rates and special taxes. Petroleum products, tobacco, alcoholic beverages and stamp duty on land transactions are the only major exceptions to GST. The provision for input credits — a person reselling goods or services can seek a reimbursement for taxes paid by the earlier seller — is an in-built incentive within the GST for being a part of the tax net. Anybody who is not a part of the GST network will not be able to claim such credits or allow people transacting with them to do so. This is expected to increase indirect tax collections and it has already served to formalise the lower end of several supply chains. GST has also cut a lot of red tape for traders who previously had to deal with multiple tax authorities while transacting across states.
Implementing a radical and universal reform in an economy as large as India is bound to witness teething troubles and GST did. Two years after it was implemented, the question is whether GST is moving towards its promise of improving tax collections and removing bottlenecks to trade.
The experience so far has not been encouraging on the fiscal front. The budget numbers speak for themselves.
The first full fiscal year after the GST was implemented was 2018-19. The 2018-19 budget estimated ~7.4 lakh crore in GST collections for the central government. This figure was revised downwards to ~6.4 lakh crore in the 2019-20 interim budget presented this February.
igures from the Controller General of Accounts in the ministry of finance show that the Centre’s GST collections actually stood at ~5.8 lakh crore for the fiscal year 2018-19. This is a shortfall of more than 20% over budget estimates. The interim budget put the budget estimates for 2019-20 GST collections for the centre at ~7.6 lakh crore. This assumes a 30% growth in GST collections compared to what was actually collected in 2018-19. Total GST collections for April and May this year do not support such optimistic estimates. Total GST collections in April and May 2018 stood at ~1.97 lakh crore. For April and May 2019, this value is ~2.1 lakh crore, an increase of less than 10% over the previous year.
Unless the early trends change drastically, there is likely to be a shortfall in GST collections for the current fiscal year as well.
Still, some experts believe that the trend will change over time.
Suvodeep Rakshit, senior economist, Kotak Institutional Equities, is optimistic about the future.
“Collection is a relative concept and GST, being a new system completely, it is not comparable. The only comparison can be made with the budget estimates. Certainly, collections are below estimates, hence the disappointment, but it will pick up gradually with improvement in processes and compliance,” he said.
Anita Rastogi, partner — Indirect Tax, PwC, says that the GST collections have increased gradually.
“However, as per the statements of government officials, it appears that they wanted the collections to be more robust. Due to step-up in implementation of anti-tax evasion practices, we expect that GST revenue collections would be further buoyant in the near future,” she said.
According to Rastogi, e-way bills (generated every time something is shipped) have helped reduce tax evasion. “This is because all supplies above a specified value need an e-way bill, which also has details of a valid tax invoice. Further, reconciliation of e-way bill data with supply-level data has also proved to be an effective tool for curbing tax evasion practices,” she said.
“The growth in GST collections after e-way bill introduction is a testimony to the fact that certain segments that were underpaying or not paying GST have now come under the radar and have started paying tax,” Deloitte India partner MS Mani said.
Indeed, GST collections have been increasing in recent months.
The collections have been more than ~1 lakh crore in the months of March, April and May this year — a first since GST was implemented. These figures give an impression that GST collections have picked up recently. But absolute tax collection figures can be misleading for such purposes. Because taxes are a fraction of economic output in an economy, absolute values normally go up with a rise in GDP levels. A better way to measure the tax generation ability of a particular tax is to look at the tax-GDP ratio. Total GST collections as a percentage of GDP have been stagnant at around 6% in the last three quarters.
If the economic growth rate were to come down further, and the GST to GDP ratio were to remain the same, it will be extremely difficult to achieve the target for 2019-20.
A bearish GST collection outlook will have a disproportionately bad impact on central government finances. This is because the current GST framework guarantees to compensate states for revenue shortfall for five years. This period could be extended by the 15th Finance Commission as states have been apprehensive of revenue implications under the new regime.
On the procedural front, there is better news. Compared to the period when the GST regime was launched two years ago and created immense problems for small businesses, particularly micros, small and medium enterprises (MSMEs), it has now stabilised. Experts, however, call it a reform in progress because it still suffers from complex compliance burdens, multiplicity of tax rates, and exclusion of key items such as petroleum products and real estate.
While outlining the country’s economic challenges and policy priorities, DK Srivastava, chief policy advisor, EY India, says it is time the next generation of tax reforms are undertaken with a view to increase the buoyancy of direct and indirect taxes.
“GST reforms may encompass fewer rates and inclusion of sectors that were left out in the first round including petroleum products.”
Several items such as petroleum products that are traditionally key revenue earners have been kept outside the ambit of GST as both the Centre and states do not want to disrupt the revenue stream.
Interestingly, petroleum products are constitutionally included in the GST system, but power to recommend the effective date lies with the Goods and Services Tax Council, the apex decision-making body chaired by the Union finance minister and represented by finance ministers of the states. “Article 279A (5) of the Constitution provides that Goods and Services Tax Council shall recommend the date on which goods and services tax shall be levied on petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel. Thus while, petroleum products are constitutionally included under GST, the date and rate, on which GST shall be levied on such goods, shall be as per the decision of the GST Council,” oil minister Dharmendra Pradhan said in Parliament on Wednesday. There were several challenges during the first year of GST, but various measures taken by the Council in proactively addressing business challenges have helped in its stabilisation, says Mani.
“While there was also a view that there were too many changes after introduction of GST, which made it difficult for businesses to comply, it is a fact that these changes helped in overcoming some of the initial difficulties that businesses were facing with GST. Many businesses faced significant challenges in the initial phase, especially in their interfaces with the GST portal. Many of these have now been overcome and we are now moving on the stabilisation phase of GST.”
Mani said the road ahead for the tax should involve the inclusion of petroleum products, the subsuming of stamp duties, making the compliance framework simpler, and using data analytics to expand the tax base in order to generate more revenues.
Some experts say that another full year is required to fix the nuts and bolts issues of GST.
“Though the changes made by the Council were the need of the hour, frequent amendments brought uncertainties in the mind of the taxpayers. The Council and the government might take one more year to fully settle the GST law,” Vishal Raheja, DGM, Taxmann said.
According to Raheja, by the next year, the government should achieve its target of the new GST return filing process and online invoice mechanism, which will provide some relief from the requirement of the e-way bill and the hassles of matching of invoices.