What is the problem?
Even though the official data for Goods and Services Tax (GST) collections in January will be released on February 1, several news agencies have been reporting that the GST collection for January 2019 will come in at ₹94,000-96,000 crore, which is lower than the year’s average and far lower than what experts estimate the government should be getting. The average collection between April and December was ₹96,782 crore. The collections crossed the ₹1 lakh crore mark only twice in the nine months under consideration. Even this was lower than the ₹1.1 lakh crore tax analysts say the government should be collecting.
Given that the GST Council cut rates on a number of items and services in its December 22 meeting, the likelihood of January’s revenue being even lower than December’s low of ₹94,726 crore is very high. If this is the case, it would mark the third consecutive month of falling GST revenue.
Why is this happening?
The GST Council, in its 31st meeting on December 22, cut rates on almost 20 categories of goods and a number of services. As a result, only one common-use item — cement— was left in the highest tax slab of 28%. The reason for the creation of the 28% slab was to offset the lower collections from the items that were made exempt from GST or put in the lowest slab of 5%.
Naturally, a reducing number of items in the 28% slab will result in lower collections. The way to offset lower rates is to increase the number of people paying tax. That is, compliance has to increase. However, analysis by The Hindu of GST data has shown that compliance has, in fact, been falling. The data show that while the number of people required to file monthly returns has grown 32% from July 2017 (when GST was implemented) to about 98.5 lakh in November 2018, the number of people not filing these returns has grown 167% during that time. In other words, the number of non-filers is growing faster than the tax base itself.
The government seems to have identified another reason for falling revenues: businesses generating fake invoices to claim higher input tax credits than they should be receiving. The tax officials are now starting to look at this in a deeper manner and examining how to plug the leaks.
The root of this problem is that the government doesn’t have an easy and accessible way to match the invoices of sellers and buyers and catch discrepancies. That system will likely be rolled out from April 2019 onwards, but there is no official clarity on what it will involve.
Why is this worrisome?
Falling GST revenues themselves are a worrisome prospect because they put pressure on government finances, and especially on other sources of revenue. Direct tax collections have been growing at a robust rate for most of this financial year. But this also means that the government will be hard pressed to reduce personal income tax rates in the General Budget of 2019-20.
Weak GST revenues also limit the government’s ability to provision enough resources for any budgetary support it might decide to give the agricultural sector or to small and medium businesses.
