Goods and Services Tax collections exceeded Rs 1 lakh crore for the second straight month in December 2019. It has given relief to the government, which was struggling with a shortfall in GST collections in the current fiscal year. When GST was first introduced in July 2017, it was expected that monthly GST collections would exceed Rs 1 lakh crore; we find that out of 30 months, so far only in nine months have collections exceeded this benchmark.
In last December’s meeting of the GST Council, this monthly revenue target has been revised to Rs 1.1 lakh crore. If we leave the year 2017-18 as a preliminary period, the total GST receipts in 2018-19 were almost near expectation (Rs 11.77 lakh crore) and the total compensation amount to states (Rs 69,275 crore) could be funded from this cess collected.
However, we find that in the current financial year 2019-20, the total GST collection is still falling short of the Rs 1 lakh crore target. So the government is under tremendous pressure to compensate state governments for loss in their GST revenue. On 16 December 2019, the Centre released Rs 35,298 crore to states as compensation. The Investment Information and Credit Rating Agency (IICRA) has estimated that compensation to the nine big states may go up to nearly Rs 70,000 crore in the current financial year, which is nearly double compared to last year. The situation would be gloomier if we add other states.
Subsuming various indirect taxes previously imposed by the Central and state governments, a new tax system with single tax—GST—throughout the country was implemented by the Narendra Modi government from 1 July 2017. This was considered a major tax reform. As per the Constitution, the Centre has the power to impose most remunerative direct taxes such as personal income tax on income other than agricultural income, corporation tax, wealth tax, etc.
Apart from this, prior to the implementation of GST, the Centre had the exclusive power to impose central excise duty on all items except local products like liquor and toiletries, and custom duties, service tax, etc.; the state governments could impose state excise duty on local products like liquor and toiletries, sales tax and so on.
With the implementation of GST most of the indirect taxes so far imposed by Union and state governments were subsumed under GST. The tax collected was agreed to be divided between Centre and states equally. It is worth mentioning that as per the recommendations of the 14th Finance Commission, states would get 42% of the Union taxes. So it means that 71% of the total GST collected would go to states, while the remaining 29% would remain with the Centre.
The proposal to introduce GST was first mooted during the UPA government as a major indirect tax reform. ‘One nation one tax’ was the mantra. With different indirect taxes levied by the Union and state governments subsumed in a single tax, GST was supposed to bring in efficiency and do away with the cascading effect that led to additional burden on the ultimate consumer. But GST was generally opposed by state governments, as they felt their rights to impose indirect taxes would be curbed. They demanded that liquor and petroleum products be kept out of its purview.
This was conceded by the Centre. But it was provided in the GST Act that these products may be included under it in future. State governments also feared that once GST is introduced, their revenues may get hurt. So, the Centre undertook that state governments would be compensated for any loss in their revenue, assuming 14% growth in revenue with 2015-16 as base. This means the Centre would not only share the proceeds of GST with state governments, but also compensate for any loss in the latter’s revenue. To ensure the Centre does not bear the burden of compensating state governments for the loss of GST, an additional cess was introduced on tobacco products, proceeds of which were to be used for the compensation.
So why is GST is falling short of expectations? When it was introduced, it was said that though we would be taxed at a lower rate, the total tax revenue would increase under GST because it would end tax evasion. But we see that though technically GST is considered to be successful, we don’t find the expected growth as far as revenue is concerned. So the Centre has to compensate states more and more, year after year. The expected check on tax evasion is also not happening as tax evaders have found new ways and means to do so. Tax credit is being claimed using fake bills. Some are claiming tax credit even on the goods purchased for their personal consumption. So far, several cases of tax credit with fake bills amounting to thousands of crores of rupees have been unearthed, while many more instances could not be unearthed.
It is interesting to note that in cases where composition scheme has been introduced, where tax credit is not taken and GST is collected on the total sales, such as restaurants, despite having a much lower rate of tax, a significant amount of revenue is being realised. However, much lower revenue is being collected from other businesses. It is unfortunate that various amendments in the GST network that have been proposed by the government are not being implemented by the agency running the network citing technical reasons. Apart from this, many more cases of tax evasion are coming to notice.
This loss of revenue in GST is a cause of major concern and it has to be dealt with sternly. Any failure in solving this problem may land us in a major crisis. The government has to plug the glitches in the GSTN at the earliest. It is worth mentioning that the income tax network is working much more efficiently and there are the least number of frauds in the same. We may have to deal with the company running GSTN with a heavy hand.
Ashwani Mahajan
Associate Professor, Department of Economics,PGDAV College (University of Delhi)
Email: ashwanimahajan@rediffmail.com