One of the reasons for inordinate delay in taking up the constitutional amendment bill for enactment of the Goods and Services Tax [GST] was the reluctance of the then UPA – government at the centre to agree to the demand of the states for 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 [VAT] plus a host of other local taxes.
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 [in mid 2016] leading to its launch from July 1, 2017. A clause was incorporated in the enactment to provide for compensation for 5 years i.e. till 2021-22 to be calculated as the difference between actual collection and the revenue they would have got with growth @14% over 2015-16 level.
Being an un-chartered 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, also got another clause included to provide for levy of ‘compensation cess’ on luxury or demerit goods [those which fall in the 28% tax slab] such as automobiles, tobacco, drinks etc with a proviso of using the proceeds for compensating the states who face shortfall. The cess was to remain in force for 5 years.
The rationale behind withdrawing this levy on completion of 5 years was that by this time, the GST dispensation would start yielding sufficient resources for the states to meet their budgetary requirements within prudential limit set under the Fiscal Responsibility and Budget Management Act [FRBM] thereby obviating the necessity of compensation. There are still three years to go before the 2022 deadline; yet, they have started raising demand for continuing this for a further period of three years. This is not unusual as the states are prone to looking for ‘safe harbor’ 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 5% against the target of 12%, even the proceeds from cess which are meant to be utilized for compensating the states for the shortfall is trailing far behind. During April – August, 2019 against the requirement of Rs 65,000 crore [@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.
If, this shortfall is to be made up, then, in the remaining 7 months of the current year, the collections will have to be @Rs 16,500 crore a month. This will require an unprecedented jump in the GDP growth – to almost double the 5% registered during the first quarter [growth during the second quarter is unlikely to be very different]. This appears to be well beyond the realm of feasibility even as most forecasts put the likely number in the 6.5% – 7% range.
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% and attendant dastardly consequences in terms of unsustainable borrowings, higher interest rates, increase in current account deficit and inflation. The ball does not stop here.
We have industries such as automobiles and cement which after having enjoyed a honey moon period for a couple of years and now in the midst of a downfall, are hell bent on extracting their pound of flesh from the union government. They want GST rate to be slashed drastically from existing 28% [plus cess in case of automobiles] to 18%. Even as the road and highways minister has promised to take up with the finance minister, if agreed to, this will entail revenue loss of about Rs 70,000 crore. The centre must not allow itself to be blackmailed and reject this demand outright.
More importantly, it needs to introspect as to why despite GST being in place for more than two years, the desired tax buoyancy has not been achieved. An overarching objective behind launching this new regime – 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 government is struggling to tap the potential.
On widening the tax net and curbing evasion, the situation is far more serious than initially thought. It seems dubious businessmen are having a heyday. According to a statement by minister of state for finance, Anurag Thakur in Rajya Sabha, the loss to exchequer due to frauds under GST was about Rs 45,500 crore since the roll out of the tax reform [according to Dr Amit Mitra, finance minister, West Bengal, this could be Rs 100,000 crore].
The number of entities registered under GST is about 12 million. This is 5 million more than the entities registered under the erstwhile dispensation prior to July 1, 2017. There is an apprehension that a slice of the increase could be fake entities which have been set up only to perpetrate fraud. When, viewed in conjunction with the fraudulent claims of input tax credit, this shows the extent of rot in the system.
For an economy of India’s size about US$ 2.6 trillion, a total tax revenue of Rs 2400,000 crore annually or Rs 200,000 crore a month should be feasible. Against this, the actual collection has been hovering around Rs 100,000 crore a month [in some months, it is even less]. It will be well nigh impossible to bridge the gap unless leakages in the system are tackled on a war footing.
So far, petroleum products viz. crude oil, gas, aviation turbine fuel [ATF], petrol and diesel have been kept out of GST. This is because both the centre and state governments get maximum tax revenue from these products which will be severely impacted if brought under GST [this will happen even if these are put under the highest tax slab of 28% which is significantly lower than the current incidence of over 50% under existing dispensation; the loss will be even more if these are placed in the lower slab of 18%].
When, will these be included? This will depend on the pace of progress in realizing the potential of GST architecture. This in turn, will be determined by the success achieved by the government in plugging leakages – besides bringing more persons under the tax net and make them pay up. In case however, it remains stuck in the grooves and collections remain where they are today, oil products will remain excluded and the economy will continue to suffer from the high incidence of tax.
Ideally, we should aim at a scenario wherein (i) the tax rates are modest; (ii) there is no need for compensation to states and hence, no levy of cess and (iii) inclusion of all oil products under GST. However, with current state of affairs, this will remain a distant dream.