The Goods and Services Tax (GST) pitched by the government as the biggest and most important economic reform undertaken since Independence, is celebrating its first anniversary, which gives us an opportunity to reflect on the monetary performance of the new tax regime and setting the right expectations for the future.
Objectives of the single tax
GST was introduced in July 2017 with multiple objectives. However on revenue mobilization the objective was to achieve revenue neutrality so as to ensure that the new tax regime does not lead to revenue loss for the government due to lesser tax collections, nor does it increase the burden on consumers by increasing the tax incidence on products.
The GST rate structure was based on the recommendations of a committee headed by the Chief Economic Advisor with the foregoing objective in mind.
During the period prior to GST (say FY 2016-17), indirect tax receipts were about Rs 12,00,000 crore approximately from Central Excise duty, Service tax and State Sales tax/VAT, working out to a monthly average of around Rs. 1,00,000 crore. This figure included sales tax levied by states on petroleum products and the State taxes on alcohol, which are presently outside the ambit of GST.
Against the above backdrop, average monthly GST collections was close to Rs 89,000 crores for the first 10 months (i.e. July 2017 to April 2018) after accounting for transitional credit of Rs 90,000 crores, claimed till December 2017. Although there is a marginal deviation of around 7% in the monthly collections from the 10 months’ average, this has to be seen in the context of some products being kept out of the GST regime. This suggests that GST collections have been by and large stable in the initial period.
Expected collections from the GST
As per the Budget estimates for FY 2018-19, the central government expects total GST collection of Rs 7,46,000 crore (excluding SGST collection by States) of which Rs 90,000 crores pertain to the compensation cess.
The government is empowered to collect the compensation cess only for a period of 5 years from GST implementation date and as a result the revenue will take a direct hit on this account from the 6th year onwards. It is only hoped that by that time the tax base would have increased to offset this loss.
Government has initiated discussions to notify the date for inclusion of petrol, diesel, natural gas and aviation turbine fuel in the GST base for which the GST Council is empowered to give recommendations.
Thus the inclusion of this sector under the auspices of the GST regime is only a matter of time. Upon inclusion of petroleum and related products, though the government will have to relinquish the input tax credit which the petroleum companies are currently unable to claim, the overall contribution towards GST from the petroleum industry is expected to go up.
Therefore, GST collections may see significant corrections in the months that follow the notification of GST on petroleum products.
Another important area where government is expected to take action is pruning of the tax rates and their convergence.At the time of implementation of GST with a four-tier rate structure (5%, 12%, 18% and 28%), the intention of the government was to gradually converge at least the standard rates of 12% and 18%, into a single rate applicable to majority of the products.
Rationalisation of GST rates
Although convergence may seem like a distant reality, nonetheless, in November the government pruned the tax rates by shifting 178 items from 28% to 18% slab.
This was another reason for the low collections in the month of November 2017, but in any further rates convergence it is expected that the government will keep the impact on revenues as a focus.
At a recent Finance Summit, a government official hinted on further rationalisation of GST rates in the coming days, thus indicating the steadiness in GST collections.
The E-way bill system has already been introduced for both inter-state and intra-state supplies and as the new fiscal year progresses, other measures to check evasion will come into place such as the tax deduction/collection at source, credit matching, increased enforcement by tax officials, improvement of the IT infrastructure etc., which are expected to raise the compliance levels and bring in stability and some growth in revenue collections.
To conclude, GST collections have been more or less stable during the initial period of introduction and the collections are expected to increase in view of greater compliance activity in the near future.
However, for a sustained growth in GST collections, the government needs to ensure that under the new tax regime, the rates are moderate and the tax base is made wider due to better compliance. GST has to be a facilitator for growth which will ensure a consequent growth in tax revenues.
Muralidharan is Senior Director, Deloitte India. Nimish Choudhary is Director and Chinmay Agrawal is Manager, Deloitte Haskins & Sells LLP.