The increasing pressure on GST revenue collections and its fallout

Monthly revenue collections from the goods and services tax (GST) are improving, but adjusting for refunds, the mop-up is not very comforting. And the recent concessions are likely to exert more pressure on tax collections, pushing the fiscal deficit higher. Last week, the GST Council cleared a proposal to incentivize digital transactions on a pilot basis via Rupay cards, B HIM a pp and the UP I system. Customers making payments through these platforms would get cashback of 20% of the total GST amount, subject to a maximum limit of Rs.100.

While the intention is to promote a cashless economy, the timing may be wrong, especially because GSTcollections are still short of the required monthly run-rate of Rs.1 trillion. Going by the estimate of the group of ministers under Bihar deputy chief minister Sushil Modi, the revenue loss on account of this movewould be Rs.1,000 crore annually. Although compliance has improved after the e-way bill implementation in May, contrary to expectations, tax collections haven’t seen a drastic increase ( see chart).

Tax collections for June slightly increased to Rs.96,483 crore from Rs.95,610 crore a month earlier. However, collections for July are anticipated t o get adversely impacted due to rate rationalization in the 28% tax slab. Last month, rates on 15 products such as vacuum cleaners, washing machines, paints and varnishes were reduced from 28% to 18% effective 27 July. Rating agency Moody’s Investors Service has estimated the revenue loss from these tax cuts at around 0.04-0.08% of India’s gross domestic product ( GDP) annually. The growing pressure on GST collections in a pre-election year would have serious implications on the government’s finances. According to Kotak Institutional Equities, the current run-rate in GST collections strongly indicates a revenue shortfall in fiscal year 2019 (FY19).

“Even if we build in an optimistic 8-10% quarter-on-quarter growth in the overall runrate, there is likely to be a shortfall of around Rs.300 billion ( translates to around 15 basis points slippage in GFD/ GDP),” it said in a report dated 1 August. Abasis point is 0.01%. Meanwhile, in the June quarter, India’s fiscal deficit stood at 69% of the budget estimate for the full year, although lower than the 81% achieved in the same quarter last year. However, recall that GST went into operation only from July last year.

The Mint, 07th August 2018