Union Finance Minister Arun Jaitley and other officials of the Finance Ministry would be feeling the pressure right about now. After all, it’s quite a nerve-racking thing to be flying blind. And make no mistake, that’s precisely what the government is doing going into Budget 2018.
The GST factor
There are several reasons behind this lack of clarity in the run-up to the Budget. As with several of the problems plaguing the economy currently, the biggest issue is the goods and services tax (GST). However, there are other aspects, some unique to this year, and other more normal, that have meant that the uncertainty has been compounded.
The immediate aftermath of the complexity of complying with the fledgling GST meant that the government had to very early on extend the various return-filing deadlines, and even do away with the need to file some key forms, which skewed its ability to get a proper handle on the expected revenue from the GST.
The final set of deadlines for GST filing are such that, come Budget time, the government will only have preliminary data to estimate its revenue position. Companies with an annual turnover of less than ₹1.5 crore had to file their returns for July to September by January 10. Larger companies, with a turnover of more than ₹1.5 crore a year, had to file their returns for the July-November period by January 10.
Now, not only is this deadline uncomfortably close to the Budget presentation date for the revenue figures to be properly incorporated, but the data period itself is too small to estimate the trend for the year. How is the government expected to estimate how much it stands to earn for the year when the only data it has are for the very first few months of GST implementation?
After all, the GST Council made sweeping cuts to the GST rates that came into effect on November 15 and which seemed to have sharply hit tax collections. But the final data for that period will not be available for the Budget.
Add to this the fact that January 10 saw a lot of confusion, since a fake notification started doing the rounds that the government had further extended the deadline to January 15, and the fact that the GST Network portal repeatedly crashed on the day. The GSTN hasn’t released any data yet on the quantum of tax filers, but experts say a large proportion of them are likely to have missed their deadline.
Further compounding this issue is the fact that, in order to ease the compliance burden, the government removed the need to file two key forms — GSTR-2 and GSTR-3 — while filing returns. The way these forms work is that a company files GSTR-1 for outward supplies to other companies, and GSTR-2 for inward supplies. It is only after matching the data in the two forms that the quantum of input tax credits to be refunded to the companies can be computed accurately. Doing away with the GSTR-2 form indefinitely means that there is substantial uncertainty surrounding the quantum of input tax credits to be paid, which again puts the government’s revenue estimates on a shaky footing.
So, not only does the government have data for only the first three or four months of the GST regime, but even that data are unreliable because input tax credits can’t be matched, rates were drastically changed following that period, and the data are unlikely to reflect all the business activity since many likely missed their filing deadline. All of this makes estimating GST revenue for the next financial year that much tougher.
But the Budget, of course, has to do with more than simply estimating revenue. It also has to do with planning expenditure. It stands to reason that if a government is having trouble estimating its revenue for the coming year, then its expenditure projections are going to be shaky too. This year, 2017-18, was also the first when the Budget was presented on the earlier date of February 1, for the main purpose of smoothening expenditure across the year and not bunching it towards the end. It’s only at the end of the financial year that we’ll know how this has turned out. Previous years’ trends will not work.
The fiscal deficit
Taken together, this has a bearing on the fiscal deficit as well. For this year, with GDP growth expected to be slower than what was estimated in the previous Budget, the absolute number for the fiscal deficit will also have to be proportionally smaller. This is a natural process. The fiscal deficit target for the year is 3.2% of GDP. So, if GDP is smaller than estimated, then that 3.2% will also work out be smaller. This gives the government less room for manoeuvre, especially since it has repeatedly committed to the fiscal consolidation path. Chief Statistician of India T.C.A. Anant has also indicated that the GDP data stand to be revised significantly once final GST data come in.
Most of these issues aren’t the government’s fault, they simply have to do with the various reforms initiated this year. But the end result has been a perfect storm of uncertainty.