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Tepid GST receipts may not impact fiscal math

Tepid GST receipts may not impact fiscal math
All states barring Delhi reported revenue losses in October on account of the goods and services tax (GST), requiring Rs 7,500-crore compensation from the Centre during the month.
This may not affect the Centre’s fiscal deficit as it will be taken care of by Rs 8,000 crore collected as compensation cess in October. The tax revenue was collected in the month of October and not for October, for which the last date for paying tax is November 20.
The Centre’s revenue collection target may come under slight strain after the GST Council last Friday decided to lower rates on over 200 items. Besides, revenue collected from the Integrated GST (IGST) may be used as credit for paying tax later.
“It is early to predict the impact on the fiscal deficit. Looking at the trend so far, the compensation cess collected is more than the revenue loss of states. Once the GST stabilises, states’ collections will improve," an official said.
Consuming states have posted higher revenue losses than manufacturing states, going against the general expectation of former benefiting from the GST, a destination-based tax. As many as 17 states reported revenue losses, ranging from 25 per cent to 59 per cent. Puducherry, Uttarakhand and Chhattisgarh, respectively, raised 59 per cent, 50 per cent and 46 per cent less revenue than estimated. Uttar Pradesh and Haryana reported 17 per cent and 16 per cent less revenue, respectively.
The Centre has paid Rs 8,500 crore of the Rs 14,000 crore collected as compensation cess to states for July and August. A cess over the peak GST rate of 28 per cent has been imposed on demerit goods such as tobacco and luxury items such as big cars and aerated drinks. The cess on cigarettes and big cars was imposed recently.
The GST Council had slashed rates on 215 items with effect from November 15, of which rates for 176 items were reduced from 28 per cent to 18 per cent.
Bihar Deputy Chief Minister Sushil Kumar Modi has pegged the revenue loss in a year due to the GST rate cuts at Rs 20,000 crore. This works out to Rs 7,500 crore in the remaining four-and-a-half months of the fiscal year. The Centre will bear a burden of less than half of this, as 42 per cent of its revenues go to states.
The revenue loss figure does not take into account neutralising factors such as a rise in consumption due to resultant price cuts and higher tax receipts because of improved compliance.
“With improved compliance, higher revenue collection will make up for the notional revenue loss," Jammu and Kashmir Finance Minister Haseeb Drabu said.
Tax experts concur with this view point. “History of tax in India has proved that whenever there is a reduction in tax rate, the collection actually goes up. Greater compliance may improve revenue. The reduction in prices of these products should also lead to increase in demand," said Pratik Jain of PwC India.
However, Bipin Sapra of EY said, “The reduction would substantially reduce the prices of a number of commodities; however, the government may need to balance the revenue considerations too."
Aditya Singhania of Taxmann said the sacrifice of 10 per cent tax revenue on an average will certainly have a short-term impact on the fiscal deficit. “However, the impact is likely to be temporary as the decision of rate cuts will certainly give thrust to higher demands for these products, which can contribute to India’s GDP which is scaling low at 5.7 per cent," he said.
Abhishek Rastogi of Khaitan & Co. opined while the rate cuts would impact fiscal deficit of the government, better compliances could compensate for improved tax collections. “Further, the businesses may exhaust the transitional credits and hence the payment from cash would increase," he said.
There is also a silver lining in the fact that the government collected Rs 95,000 crore GST revenue in October, up from Rs 93,000 crore in September. If the trend persists, this will offset any marginal loss from the tax cuts.
The Business Standard, New Delhi, 17th November 2017

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