The finance minister, Nirmala Sitharaman has constituted a high level committee consisting of the representatives of the centre and states to study the reasons as to why tax collections under GST [Goods and Services Tax] have been slack and suggest measures to boost.
The GST was launched on July 1, 2017. While, it may not be realistic to expect the desired buoyancy during the first year [as it takes time for the system to stabilize], during 2018-19, in all fairness, one would have expected the tax collection to pick up. But, the year ended up with big disappointment as the actual collection for the union government [it includes CGST (central GST), compensation cess and undistributed portion of IGST (integrated GST)] was about Rs 579,000 crore – Rs 65,000 crore short of even the revised estimate [RE] of Rs 644,000 crore as per the interim budget [presented on February 1, 2019] which itself was Rs 100,000 crore lower than the budget estimate [BE] of Rs 743,000 crore.
This has prompted Sitharaman to reduce the target for current year from Rs 761,000 crore – fixed in the interim budget – to Rs 663,000 crore. To get there, total GST collection [including SGST (state GST)] should be at least Rs 110,000 crore per month. But, this was crossed only in one month April, 2019 [Rs 113,000 crore]; thereafter, it declined sharply to about Rs 98,000 crore during August, 2019 and further down to Rs 92,000 crore during September, 2019. During April-September, 2019, the collection was only Rs 606,000 crore. At this pace, it looks well nigh impossible to achieve even the revised target.
It is evident that the shortfall in GST collection will be huge leaving a big hole in the overall revenue and is unlikely to be plugged by the bonanza the centre has received from the Reserve Bank of India [RBI] by way of dividend plus surplus reserves besides other sources such as disinvestment proceeds. No wonder, Sitharaman is worried and has ordered a comprehensive review.
By replacing multiplicity of taxes [a total of ‘17’ levied at the centre and state level] germane to the erstwhile dispensation with ‘one nation, one tax’, GST was expected to boost the gross domestic product [GDP] and in turn, manifold increase in tax revenue. Even more crucially, the revenue was to get a fillip by bringing under the tax net millions of enterprises hitherto not paying tax. On both counts, the results so far have been far from pleasing.
The growth in GDP started decelerating from the second quarter of 2018-19 even as that year ended up with overall 6.8% [down from 7.2% achieved during 2017-18]. The deceleration has continued during the current year with the growth during the first quarter ending June 30, 2019 plummeting to a six year low of 5%. For the whole of 2019-20, the RBI has lowered its forecast from earlier 6.9% [already down from its previous estimate of 7.4%] to a low of 6.1%. The impact of this on tax collection is evident.
The second factor requires closer scrutiny. At the outset, what makes us believe that GST will force millions of businesses hitherto not paying tax to come under the tax net. This has to do with the fundamental premise of it being a tax on the ‘value addition’ at every stage in the supply chain. It implies that a supplier say ‘X’ can claim credit [a jargon for refund] for the tax paid by him/her on purchase of inputs – also known as input tax credit or ITC.
If, a firm wants to do business without coming on record with the sole intent of avoiding payment of tax even while collecting from the consumer [this was happening on gargantuan scale under the erstwhile regime], he/she won’t be able to claim ITC. At the same time, he/she runs the risk of being caught, as his/her transactions will get reflected in purchase/sale of others doing business with him/her. So, he has no other option but to come on record and pay tax.
However, things will pan out the way intended only if all transactions are uploaded and GST network [GSTN] carries out reconciliation of all purchases and sales on real time basis. This is where the authorities seem to have erred. In a bid to entice businesses/firms transit to the new dispensation without any hassles, they allowed claim of ITC on ‘self-assessment’ basis – without even uploading the invoices. If, there are no invoices on the GSTN portal to match, how will they determine that the claims are genuine?
Dubious businesses have exploited this lacuna to the hilt and got away with bogus claims. According to a statement by minister of state for finance, Anurag Thakur in reply to a question in Rajya Sabha, loss to the exchequer on account of frauds [including bogus ITC claims] was about Rs 45,500 crore since the roll out of the tax reform on July 1, 2017. This is the loss which has come to notice. The actual could be much more. [according to Dr Amit Mitra, finance minister, West Bengal, this could even touch Rs 100,000 crore].
There could also be millions of transactions which bypass the GSTN thereby depriving the exchequer tens of thousand crores. Though, the government had introduced ‘e-way bill’ last year, this is not a foolproof system [for instance, a firm can split consignment to make it less than the threshold of Rs 50,000/- thereby escaping the requirement of e-way bill]. The only way we can have a foolproof system is to insist on generation of all invoices electronically or ‘e-invoicing’. This will ensure instantaneous upload of all invoices on the GSTN portal and comparison on real time thereby detecting any transaction which is sought to be hidden.
Reportedly, GST Council intends to implement e-invoicing from January 1, 2020. However, considering that in the past, timelines were invariably missed, one wonders whether this most crucial timeline will be complied.
A third major reason behind lack of desired buoyancy in tax collections has to do with the decision of GST Council to treat small businesses with kid gloves. For instance, service providers with turnover less than Rs 5 million under ‘composition scheme’ pay tax @6% as against 18% on normal assesses. Though technically, the former can’t raise a tax invoice but the tax [albeit @18%] is included in the simple sales invoice. This enables him to pocket the differential. This also leads to huge loss of revenue. For details:-
https://www.uttamgupta.com/economic-outlook/incentivise-dont-destroy-business/
What then is the way forward? As regards, GDP growth already the government has injected some booster doses [including steep reduction in the corporate tax rate and ‘policy rate’ or interest rate at which RBI lends money to banks]; hopefully, the industry and businesses will respond. However, with regard to payment of taxes, it will really need to act tough by showing zero tolerance towards frauds and using technology with alacrity to ensure that every transaction is brought to book and tax due is paid in full.
As regards, small businesses considering their crucial in creating jobs and widespread demand, while they may be incentivized by giving them concession in income tax, there should be uniform treatment when it comes to GST. Being an indirect tax, this is paid by the consumer and the job of a dealer or service provider is to simply collect and pass on to the government. Yet, any attempt to have differential GST – based on who is the supplier – will create perverse incentive; hence, it should be avoided.