One nation, nine taxes, falling GST revenue collection

In the chapter on GST in his recent book ‘India Unmade’, former finance minister Yashwant Sinha said GST meant “Gayi Sarkar Teri Tax”. While it may be premature to write off GST as a failure, after the 32nd meeting of the GST Council, the government will find itself in an extremely uncomfortable position to defend their favourite catch-line for GST — “One Nation, One Tax”.

By giving state governments an option to decide in a week’s time (from the date of the meeting) between Rs 40 lakh and Rs 20 lakh as the threshold limit, the GST Council seems to be losing its hold over decision-making ever so slightly. This could also be due to a change in the constitution of the GST Council after the results of the recent state elections.

Another reason why defending the catch-line is going to be difficult is the introduction of a special composition rate of tax at 6% for services, taking the total rates of tax under GST to nine (0%, 0.10%, 0.25% 3%, 5%, 6%, 12%, 18%,28%). Though the composition tax rate for services is much higher than the rate of tax for other composition dealers, pegging the rate at 5% would not have made much difference to GST revenues. Having an outlier rate of 6% (divided equally between CGST and SGST) gives rise to a risk that the rate can be changed randomly at the whim and fancy of the Council.

Composition Scheme

Giving further relief to composition dealers, the Council increased the limit of annual turnover in the preceding financial year for availing Composition Scheme for Goods to Rs 1.5 crore. Special category states would decide, within one week, about the Composition Limit in their respective states. The compliance under Composition Scheme has been simplified as now they would need to file one annual return, but payment of taxes would remain quarterly, along with filing a simple declaration.

There would be two threshold limits for exemption from registration and payment of GST for the suppliers of goods -- Rs 40 lakh and Rs 20 lakh. The threshold for registration for service providers would continue to be Rs 20 lakh and, in the case of special category states, Rs 10 lakh. The decision to leave out service providers from the threshold exemption limit is bound to be contested as it splits the population of taxpayers into two categories, thereby negating one of the canons of taxation promulgated by Adam Smith — equity.

Free software

Another surprising decision made by the Council was that a free accounting and billing software would be provided to small taxpayers by GSTN. Though this is a noble gesture, it still remains surprising because taxpayers are going to be wary of any software coming out of GSTN due to the issues they faced while working on the GST portal.

With the Council reducing compliance for small taxpayers at each one of their meetings, the question that arises is, why would a small taxpayer, who pays taxes only quarterly and files returns annually on a composition basis, need a billing and accounting software.

Cess

The GST Council approved levy of cess on intra-state supply of goods and services within the state of Kerala at a rate not exceeding 1% for a period not exceeding two years. Whether this was a well-thought out decision based on Kerala SGST revenues or just another ad-hoc percentage is not known. It is important that the cause is met rather than an arbitrary cess being levied.

One of the decisions that the real estate sector was expecting from the Council was the reduction in the rate of taxes on properties under construction to 5%. The Council disappointed them by deciding to constitute a Group of Ministers (GoM) to decide on the nuances of GST for the real estate sector. Another GoM will decide on how lotteries would be taxed under GST.

It is possible that the GST Council is passing on some decision-making to the state governments due to the fact that many states have complained of an acute shortfall in revenue collection post-GST. As per the GST law, the Centre compensates states to ensure that their revenue is protected at the level of 14% over the base year tax collection in 2015-16.

Many states, including Karnataka, have said they are facing revenue shortfall following the implementation of GST. These states are facing revenue shortfall in the range of 14-37% in the April-November period. Among the union territories, Puducherry is facing the maximum shortfall – 43%. As is its wont, the GST Council formed yet another GoM to investigate the reasons for the revenue shortfall.

Aggressive assessments?

GST laws as they are today are very different from what they were on July 1, 2017. Invariably, the GST Council has been liberal in the decisions taken. However, one cannot ignore the fact that all the relaxations and concessions doled out are going to impact GST revenues. There is very little elbow room for the Council to increase revenues, apart from incentivising taxpayers to comply. During this period, some Indian taxpayers have discovered ways to beat the system by incorporating dummy companies that issue fake invoices with fake names.

In the build-up to the elections, one can expect the government to go soft on GST assessments. Considering all that has happened in GST, one can expect some aggressive assessments during the second half of the year. The department should be careful in targeting the right people for aggressive assessments. One of the signs that a law has failed is when the wrong set of taxpayers are targeted to mop up additional revenues.

(The writer is a Bengaluru-based tax expert)