As a watershed tax reform, Goods and Services Tax (GST) promised to have a profound impact on India’s budget-making exercise. The debut year has proved something of a disappointment. But as teething troubles with the new tax regime are addressed, there are three key areas where its reformative impact on the budget process may be felt.
One reason why Indian Finance Ministers (FMs) have such a tough time balancing their budgets is the our narrow tax base. While a crackdown is on to identify evaders, the GST was expected to expand the indirect tax base and plug leaks in the indirect tax compliance structure.
Wider tax base
The GST was expected to deliver an expansion in the indirect tax base, sweeping more small and mid-sized businesses under its ambit, compared with the excise duty regime. It mandates registration for all entities with an annual turnover of ₹20 lakh or above. To ensure better compliance, GST has a self-policing mechanism by way of invoice matching of supplies by every registered assessee, a reverse charge mechanism for unregistered suppliers and e-way bills to check under-invoicing.
So has GST managed to net new taxpayers? It started off well by reporting 72 lakh registrations at the outset, which has steadily climbed to 99 lakh by December 2017. While the bulk of these numbers came from the automatic migration of erstwhile state VAT, excise and service tax assessees to the GST network, government estimates suggested that about 18 lakh new assessees had registered afresh. The GST tax base of 99 lakh is prima facie a good number, given that the combined taxpayer base under all the taxes that GST subsumed (excise, service tax, VAT, sales et al) was estimated at 75-80 lakh.
But the larger base, so far, hasn’t translated into a fatter indirect tax kitty. Government releases suggest that GST collections started off with a bang in July 2017 at ₹92,283 crore, but have ended with a whimper, with monthly collections at ₹80,808 crore for November 2017. These are subject to later revisions too, based on input and transitional credit claims and refunds.
One explanation for the falling collections in recent months is the wide-ranging cuts in GST rates that the GST Council has effected recently to pre-empt any inflationary impact from the tax change. In November, for instance, rates on 177 items were slashed from 28% to 18%. Some official estimates have placed the revenue foregone due to these rate cuts at ₹20,000 crore a year.
The other reason for moderating collections though, is lacklustre compliance. Even as registrations have been growing significantly, the number of GST return filers has dwindled from about 59 lakh in July to 53 lakh for November. Excluding taxpayers under the composition scheme who are supposed to file their returns only on a quarterly basis, this suggests that less than two-thirds of registered 99 lakh entities, are filing their returns and paying the tax due.
With filers dwindling and rates declining, GST collections have predictably headed south. With the monthly run rate on collections for the first five months of FY18 at about ₹88,000 crore, doubts are now emerging as to whether GST will even match the taxes it has subsumed this year. While there are no official targets for this year, analyst estimates suggest GST will have to mop up anywhere from ₹10 lakh crore to ₹12 lakh crore for FY18, for the fisc to remain revenue neutral.
Glitches in the GST network which prompted the Council to relax some of its compliance requirements may have contributed to falling return filings in recent months. Therefore, the key to fixing the shortfall in collections may be for the GST Council to focus on the compliance in the coming months. It can either reinstate the policing mechanisms that have been deferred, or bite the bullet to selectively raise GST rates.
In the pre-GST era, indirect tax targets in Union Budgets relied heavily on qualitative judgments and extrapolations of previous year’s numbers. Every year, ahead of the Budget, the CBEC would compile sector-wise indirect tax collections for the previous year and source growth projections from respective Ministries to arrive at its forecasts for the next year.
The Finance Ministry would then put together the forecasts from CBEC and CBDT and arrive at its numbers, with (often sizeable) tweaks to ensure that the fiscal math added up. But the problem with this approach was that actual revenues for the year often fell short, leading to a last-minute scramble and aggression on collections. While the Central budget at least used estimates, State budgets were a complete black box. By unifying central and State levies, GST is expected to render budget revenue forecasts more reliable. The monthly return filings are designed to give the FM a real-time handle on collections, with rich data to assess compliance.
But while GST can help the FM arrive at better forecasts in the long run, transitional issues in GST have made this year’s budget exercise more challenging. The 2017 Budget had to skip GST targets as the law was still in the making, and presented numbers for excise and service taxes alone. The Budget may now have to sum up excise/service tax mop-ups until June, patching on GST collections from July to measure the annual mop-up.
The targeted GST number is also shrouded in mystery due to lack of data on State VATs and fluidity in GST rates. It is unlikely that all the tangles will be sorted out by February 1 for a clear picture of the real potential of GST to emerge. Hopefully, the next fiscal will bring clarity.
In India, one aspect of the annual budget spectacle is industry groups lobbying for indirect tax cuts. The FM, after considering conflicting demands, doled out cuts or effected increases, with the stock markets eagerly hanging on to his every word. But with excise duty and service tax now under GST and the decision-making powers on rates vesting with the Council, the FM may have limited room for such giveaways.
Budget speeches from now on may have to dwell more on direct taxes and basic customs duty changes. And yes, products still outside the GST ambit (alcohol, fuel and energy, land) offer scope for rate changes.
But then, this may be a good development from a policy perspective. Without all the trimming and tucking on rates, the Budget exercise can now focus on aspects of government finance that really matter — measuring the outcomes of allocations made in previous budgets, changing the skewed capital-revenue mix of the fisc, reforming the draconian tax administration and attacking the bloat in unproductive revenue expenditure.
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