GST’s performance versus promise

The design of GST integrates the entire value chain from raw material to retail for the purpose of indirect taxation. Reuters  

As the Budget draws nearer, the GST revenue picture has assumed great importance. The fiscal projections and the ability to fund welfare schemes hinge on this. Therefore, we have to ask a fundamental question on how GST revenue has done? Has performance lived up to its promise? From the evidence available, the answer would be a qualified ‘Yes’.

The widespread perception that the GST revenue growth has not done well is unfair as the GST revenue performance should not be measured against the ambitious targets set, but against the growth of the nominal GDP.

First-year, first show

An assessment was made by Kapil Patidar and Arvind Subramanian in June 2018.

This showed that in the first year of implementation of GST, revenues grew by 11.9% and the buoyancy was 1.2. A buoyancy ratio over 1 shows progressiveness in the revenue growth and opens up the prospect of a rising tax-to-GDP ratio. This is a significant improvement over the pre-GST period when the buoyancy ratios for State value added tax (VAT) and Central indirect taxes like central excise and service tax were less than 1. The revenue performance is especially creditable given the transitional difficulties during implementation and teething technical problems with the GST network (GSTN).

Some other analyses show that the tax-to-final consumption expenditure also grew from 10.3% in the year before GST (2015-16) to 11.9% (including adjustments for transitional credits) in 2017-18. However, the State-wise picture shows that some States did better than the others. The States that had a high percentage of origin-based taxes in subsumed revenues — Bihar, Chhattisgarh, Himachal Pradesh, Punjab and Odisha — were found to lag behind in subsequent revenue performance. The relative buoyancy of GST revenue compared to the pre-GST period is not surprising. This is a result of two factors.

One, the design of GST integrated the entire value chain from raw material to retail for the purpose of indirect taxation. This design reduced non-compliance in downstream trading, as these entities chose to register to avail of the input tax credit generated upstream.

The GST revenue growth will reach a steady normal rate only when the effect of the transitional credits are extinguished. Here, the trends are promising. This is also indicated by the fact that monthly CGST revenues are slowly inching towards monthly SGST revenues — the utilisation of the transitional credits has a greater impact on the CGST rather than the SGST. It is for this reason that GST revenue buoyancy is likely to do much better in the coming year.

This, however, requires some policy measures going forward. First, the revenue performance of the composition dealer has been disappointing.

Therefore, the imposition of duty on the composition dealers levied on the Reverse Charge Mechanism (RCM) basis could be an important anti-evasion measure going forward. Second, the introduction of the new GST annual return form and matching of invoices will substantially improve compliance.

Third, the GST taxable base must be expanded to include petroleum products (especially aviation turbine fuel and natural gas in the first round), then bring in real estate and electricity. A further surge in GST revenue will happen once land and real estate is brought under the GST net. This will clean up the land market and the revenue gains will be more on the direct tax side as more transactions are reported under GST. Fourth, greater coordination between investigation agencies in the CBDT and CBIC could yield better results.

The I-T department has already incorporated GST registration and turnover information in their return formats. Finally, the policy to improve revenue buoyancy has to be data driven.

Unfortunately, today, detailed sector-wise analysis of revenue is hampered by lack of separate data on the sectoral profile of the new registrants and of separate revenue trends for goods and services. There is a perception in many States that revenue from services has lagged expectations. This can be rectified by a small modification in the format of the GST annual return. This modification would require companies to indicate the HSN (Harmonised System of Nomenclature) code in eight digits in respect of goods supplied by them and accounting codes of each of the services provided.

Duty payment in cash should be indicated code wise for each of the goods and services. In conclusion, one could use the metaphor of the mythological churning of the ocean by the Devas to generate nectar resulting in the poison surfacing first.

The implementation of GST similarly has seen transitional difficulties coming to the forefront in the initial period. Hopefully, in future, we will see the GST yield more of the promised nectar.

(The writer is national leader, Tax and Economic Policy Group, EY India. Views are personal)

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Printable version | Jan 21, 2022 7:14:42 PM |

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