An overriding criterion for assessing the impact of the Goods and Services Tax [GST] introduced from July 1, 2017 is the revenue garnered under the new dispensation.
The collection during the 8 months of the last financial year [March, 2018 is excluded as revenue on tax levied in that month would accrue only in the following month i.e. April] Rs 89,000 crore per month. Given unavoidable glitches during the initial phase of implementation of any new system and it takes time for it to stabilize, collections during this period may not be a good indicator.
However, during 2018-19, one would have expected an unprecedented surge. This is all the more when one takes into account implementation of anti-evasion measures such as e-way bill, matching of invoices, reverse charge mechanism, simplification of return filing etc which were all kicked in at the beginning of the year.
At the year start, the government had set a monthly target of Rs 100,000 crore. Against this, out of 9 months during April-December, 2018, except in 2 months i.e. April and October when it crossed Rs 100,000 crore, for the remaining 7 months, the collection hovered in the Rs 94,000-97,000 crore range. The average monthly revenue for the period was about Rs 97,000 crore.
Specifically, in regard to central GST [CGST], against the yearly target of Rs 604,000 crore, the collection during April-December, 2018 was Rs 341,000 crore. This means that the collection during remaining 3 months will have to be Rs 263,000 crore to reach the target. This translates Rs 87,000 crore per month as against the highest inflow of Rs 58,000 crore recorded in July, 2018.
Even if the July 2018 figure is achieved during January/February/March, 2019 [won’t be easy], the government will face a shortfall of about Rs 90,000 crore. This will cast a shadow on its ability to achieve the fiscal deficit target of 3.3% of the GDP.
Under the extant arrangement, the center is obligated to compensate states for loss of revenue with reference to a benchmark [14% growth over 2015-16 level] for 5 years till 2021-22. Now, the GST Council is keen to extend this by a further 3 years up to 2024-25. This also points towards the inability of the system to bring about the desired surge in tax collection.
So, what is coming in the way? Why is the government not able to achieve the desired buoyancy in revenue?
Prior to July 1, 2017, there were 17 different types of taxes besides cascading effect of tax-on-tax. The effective incidence of tax at the bare minimum was 31% plus. Under GST – a single tax regime – tax on majority of the items is less than 18% besides being free from the cascading effect as the tax is levied on value addition at every stage. While, lowering the burden on consumers [a major objective of the new regime], this may not per se result in higher revenue.
However, the real potential of GST lies in bringing more assesses under the tax net as given its inherent dynamics [tax is levied only on the value addition at every stage in the transaction chain] it compels a person to be part of it or else he won’t be able to avail of the credit on tax paid on his purchase. If, he chooses to be out of it, his margin from the business may be wiped off by un-availed tax credit.
At present, the number of businesses registered under GST are 12 million which is 5.4 million higher than 6.6 million registered under the erstwhile excise and VAT regime. This represents an increase of 80% which may sound impressive. But, this is peanuts when compared to what is possible. To get an idea, look at the following numbers.
There are about 65 million micro, small and medium enterprises [MSMEs] operating in the so called ‘informal’ sector. Hitherto, majority of them have remained outside the tax net and there could not be a more potent way of bringing them in. Yet, what we have got so far is less than 10% of this vast pool.
Even those who have come in have hardly made any contribution to the tax revenue. For instance, businesses having turnover in the Rs 2 million to 10 million range constitute about 25% of those registered under GSTN but their contribution to revenue is only 5%. Further, more than 50% of registered firms have turnover less than Rs 2 million [this being the exemption limit, as per rules, they need not]. Yet, their contribution to revenue is a meagre 1.5%.
A major reason for low contribution from majority of the registered entities could be their treatment by GST Council with kid gloves. Thus, a trader/manufacturer with turnover less than Rs 15 million is allowed to join the composition scheme. They get away by paying a mere 1% tax on their turnover. Now, there is a move to give even service providers the benefit of this scheme. Thus, a service provider with turnover of say less than Rs 5 million may have to pay 1%.
The rules provides for an exemption/threshold Rs 2 million. An entity having turnover below this need not get registered under GSTN. It need not pay any tax. This enables millions of businesses remain outside the tax net thereby denying the exchequer tens of thousands crore. Now, there is a move to increase the threshold to Rs 7.5 million which will result in further loss of revenue.
The leeway given to MSMEs is prompted by the need to reduce the compliance burden. The objective could be better served by having a simpler tax regime with no more than three slabs – eventually to a single rate – instead of the current multiple rates and further sub-categorization based on a host of criteria. This would also lead to huge surge in revenue without burdening consumers.