GST: falling revenues, rising populism

A major reason behind the body blow the BJP received in the recent assembly elections in three Hindi heartland states of Madhya Pradesh, Rajasthan and Chhattisgarh was the disenchantment among the micro, small and medium enterprises (MSMEs), which employ the maximum number of persons -- next only to agriculture. These persons also account for a big chunk of the middle class.

Sensing that MSMEs were affected due to faulty implementation of the Goods and Services Tax (GST), besides demonetisation, the GST Council at its 32nd meeting took decisions intended to give them major relief. These include: (i) increased the exemption limit from Rs 20 lakh to Rs 40 lakh (a business entity having turnover below this does not have to register under GST and pay tax); (ii) increased the threshold for entities who opt for composition scheme (under it, a trader/manufacturer pays tax @1% and faces minimal compliance) from Rs 1 crore to Rs 1.5 crore. Further, they can file annual return instead of quarterly as at present; (iii) bring service providers under composition scheme under which an entity with turnover less than Rs 50 lakh pays tax at 6%.

These decisions, effective April 1, may give MSMEs reason to rejoice, but the Council can’t be oblivious of their adverse effect on tax collection.

The GST kicked off on July 1, 2017. During the residual eight months of the last fiscal (March 2018 excluded as revenue for this would accrue in the following month), the average monthly collection was Rs 89,000 crore. Given the infrastructure/IT-related glitches during the initial stages of implementation, collections during this period may not be a good indicator.

However, with the system stabilised, adoption of anti-evasion measures such as introduction of e-way bill, matching of invoices, etc., during the current fiscal, the government was hoping for an unprecedented surge. Accordingly, it fixed a target of Rs 1 lakh crore per month. Against this, during April-December 2018, except in April and October when it crossed Rs 1 lakh crore, for the remaining seven months, the collection hovered in the Rs 94,000-97,000 crore range. The monthly average for the period was about Rs 97,000 crore.

As for central GST, against the yearly target of Rs 6.04 lakh crore, the revenue during April-December 2018 was Rs 3.41 lakh crore. This would require collection at Rs 87,000 crore per month during the remaining three months to reach the target. Against this, the highest inflow of Rs 58,000 crore was in July 2018. Even if July 2018 figure is achieved during January/February/March 2019, a daunting task, the government will still face a shortfall of about Rs 90,000 crore.

So, what is coming in the way? Why is the government not able to achieve the desired buoyancy in revenue?

Adding businesses

The real potential of GST lies in bringing more assesses under the tax net as, given its inherent dynamics (tax is levied only on the value-addition at every stage in the transaction chain), it compels a person to be a part of it or else he will not be able to avail credit on the tax paid on his purchase. If he chooses to be out of it, his margin from the business may be wiped off by unavailed tax credit.

At present, the number of businesses registered under GST are 12 million, which is 5.4 million higher than the 6.6 million registered under the erstwhile excise and VAT (value added tax) regime. This may sound impressive, but it is peanuts compared to what is possible. To get an idea, look at the following facts.

There are about 65 million MSMEs in the so-called ‘informal’ sector. Hitherto, a majority of them have remained outside the tax net and there could not be a more potent way of bringing them in than the new GST dispensation. Yet, the government has so far garnered access to only 5.4 million, or a mere 8% of this vast pool.

Even those who have come in have hardly made any contribution to the tax revenue. For instance, businesses having turnover in the Rs 20 lakh to Rs 1 crore range constitute about 25% of those registered under GSTN, but their contribution to revenue is only 5%. Further, more than 50% of registered firms have turnover less than Rs 20 lakh (this being the current exemption limit, as per rules, they need not have registered). Yet, their share in total revenue is a meagre 1.5%.

A major reason for low contribution from a majority of the registered entities is their treatment by GST Council with kid gloves. Thus, a trader/manufacturer with turnover less than Rs 1 crore can avail of the composition scheme. He gets away by paying a mere 1% tax on his/her turnover. Now, with threshold raised to Rs 1.5 crore, more businesses will gain at the cost of the exchequer. With service providers also roped in, the revenue loss will aggravate.

The hike in exemption limit from Rs 20 lakh to Rs 40 lakh will throw millions of businesses outside the tax net, thereby denying the exchequer thousands of crores in revenue.

At this juncture, when there is dire need to boost tax collection, the Council’s decision to forego revenue in such a brazen manner is untenable. The argument that entities in lower turnover range contribute less to the kitty and hence can be kept out is bizarre. The focus should be on getting revenue due from those already in and bring more under the tax net.

The plethora of exemptions and composition schemes need to go. The objective of reducing the burden of compliance is better served by having a simpler tax regime with no more than 2-3 slabs — eventually leading to a single rate — instead of the current multiple rates and further sub-categorisation based on a host of criteria. The GST regime needs to be freed from populism.

(The writer is a New Delhi-based policy analyst)