What falling GST revenue collection portends

There can be a lot of confusion about GDP data being released by the government but there is absolutely no doubt that the amount of GST revenues being collected month-on-month are consistently between Rs 90,000 crore and Rs 1 lakh crore. Hopes were raised when October collections touched Rs 1 lakh crore. However, November disappointed, with Rs 97,600 crore.

With no major changes expected in the regulations and taxpayers getting used to the system, it is clear that collections for the financial year will fall significantly short of targeted revenue. A small dent in maintaining the fiscal deficit target is inevitable — the government should put a ‘Plan B’ in place to keep fiscal deficit in check.

It is not that the government is unaware that the fiscal deficit is a matter of concern, considering erratic GST revenues and a general stickiness in the economy. It is possible that the reason the government is eyeing the RBI’s reserves is to assist in containing the fiscal deficit. The government gave another hint that it is worried about the impact of GST revenues when it amended the GST (Compensation to States) Act, 2017.

The Act allows the central government to levy a GST Compensation Cess on the supply of certain goods and services. The receipts from the cess are deposited to a GST Compensation Fund, which is used to compensate states for any loss in revenue following the implementation of GST. Under the Act, any unutilised amount in the Compensation Fund in 2022 (five years from the start of GST) is to be distributed equally between all the states, on the one hand, and the Centre, on the other.

In August 2018, a Bill inserted a provision in the Act specifying that any unutilised amount as recommended by the GST Council in the Compensation Fund at any time till 2022 will be distributed in the manner specified originally. By replacing “year 2022” with “any time”, the Centre and the states can dig into the Compensation Cess fund whenever they want. The Act specifies that compensation payable to states has to be released at the end of every two months and any shortfall in compensation should not exceed the total amount transferred to the Centre and states.

In quite a few states, GST officers have commenced visiting taxpayers and asking them questions on their returns. After 17 months of introduction of a tax that is supposedly completely online, we seem to be reverting to the erstwhile Service Tax era where filing of returns and payment of tax was online but enquiries and assessments will necessitate an offline meeting between the taxpayer and the department. The government also has an ominous-sounding name for this — targeted action.

In a few cases, the department has commenced a service tax audit for past years although service tax was morphed into GST on July 1, 2017. Commencing audits under an erstwhile law 18 months after a new law has replaced it can only lead to two conclusions — either the department staff have lots of time to kill or they want revenue, no matter under whether past law or present law. If the latter is true, litigation lawyers can expect plenty of business for years to come.

Economic environment

Tax revenues reached only 39.4% of the full-year target by the end of September 2018. The festive season too has failed to meet expectations as of now, with many consumer-facing businesses such as cars reporting tepid sales. Various other economic indicators, such as core sector growth, have also have failed to impress in recent months. In the midst of an uninspiring economic scenario, it would be a very brave statistician who would forecast robust GST revenues in the next few months of the financial year.

The export sector, for example, has been affected by undue delays in GST refunds worth thousands of crores of rupees. Not enough information is being published on the status of refunds — how many claims have been made, how many processed, and how many are due. All numbers being presented on GST should be presented net of refunds due, to present an accurate picture of revenues.

Crystal-gazing into 2019, how GST laws pan out will depend on the outcome of the elections. If the present government continues, one could expect tightening of the laws and added emphasis given to maximise collections at all cost. If an alternative government is formed, they will attempt to tinker with the laws just to prove that they are doing something different as compared to the predecessor. A hung parliament, followed by a loose coalition, may ensure that the present system can continue till an alternative is found. Irrespective of who comes to power, the taxpayer can expect another year of frequent changes.

It is possible that the proposed new system of filing returns can bring in better revenues as a system of checks and balances has been conceptualised for critical items such as input tax credit. Even before they mandate it, the government will do well to test the new system. It is possible that some taxpayers have decided that they will commence the new system only if they do not suffer “Portal Ennui”- a feeling of tiredness just by looking atwww.gst.gov.in all day and waiting for some magic to happen.

The minutes of the 27th GST Council informs us that states like Uttarakhand, Himachal Pradesh, Punjab and Jammu and Kashmir had a revenue shortfall in excess of 30% after transitioning to GST. Surprisingly, states like Gujarat and Karnataka reported revenue shortage in excess of 20%. Once the compensation formula to states ends in 2022, it is possible that state governments will be empowered to add some percentage points to existing GST rates on specific products being supplied from that state.

From 2023, it is quite possible that the concept of “one nation, one tax” could become “One Nation, One Tax, Each State, Special Tax”.

(The writer is a Bengaluru-based tax expert)