The cut in goods and services Tax (GST) on 177 items to 18% from 28% may have short-term revenue implications higher than the ballpark figure of Rs 20,000 crore quoted by some governnment officials, analysts reckon. This, they said, is because many businesses will have a larger pool of tax credits from the previous tax rate on their inputs, which they will likely use to meet their (now reduced) output tax liability over the next three-four months, rather than pay it in cash. Businesses which have procured input for their final product at 28% will have a lower final tax liability at 18%. This would lead to an accumulation of input tax credit which would be utilised to pay taxes till it is exhausted. A typical business can use the ITC till mid-February and may have to pay much cash only later. “I believe any change of this magnitude will force the economy to adjust demand and supply tangents again. However, I am not worried about this. My concern is on two accounts: one, a potential fall in tax collections that is bigger than anticipated and the fact that tax revenues would shift from one state to another during this period,” Rajat Mohan, partner, AMRG & Associates said.
He added that assuming other factors constant, the government may generally see a depletion in tax revenue for next 4 months. (See illustration) In its 23rd meeting, the GST council left only 50 items in the highest bracket after it was felt that the revenue from GST in the first three months had stabilised and gave the Council enough margin to reduce rates. Some of the items that saw rate reduction include furniture, mattress, wire, cables, shampoos, hair cream, cocoa butter, cinematographic cameras, projectors and image projector. “While the collection figures for the initial months of the GST rollout appear to be stabilising, it will be interesting to evaluate the impact of the recent rate reductions on collections in the coming months.
“The expectation would be that the expansion of the tax base and improved compliance would make up for the reduction in revenues due to rate reductions,” MS Mani, partner GST, Deloitte India, said. The combined revenue to both the Centre and states from taxes subsumed in GST was Rs 8.8 lakh crore in FY16. This revenue base was divided roughly equally between the Centre and states. It was decided by the council that states need to be compensated for any revenue shortfall from what they could have achieved with 14% increase in revenue from these taxes annually. That puts the total GST revenue for the current fiscal at around `11.5 lakh crore or around Rs 96,000 crore a month. The actual GST revenue in each of the first three months since the new tax’s launch has been around `92,000-95,000 crore, which is broadly in line with the projections.
The monthly revenue due to states is seen at upwards of `43,000 crore. However, since integrated GST revenue disbursal is with a lag, the perception of a revenue shortfall exists among most states. The Centre has already disbursed about Rs 8,600 crore to states to meet their revenue deficits in July and August, mostly for the later month. Collections have picked up further in September (up to October 31, Rs 95,131 crore was collected). While the GST Council has estimated that the revenue loss of the rate reduction for commodities and restaurants would be around Rs 20,000 crore annually, some experts say it could be much higher.
“If the revenue impact is only around Rs 2,000 crore monthly, it would be manageable but its likely that it may fall by much more. So, if the GST revenue collection for a month falls to, say, Rs 85,000 crore, then the government may struggle to compensate states and meet its own budgetary target,” an analyst said on the condition of anonymity. “I believe pruning of tax rates is good, but recurrent vacillations in tax rates is debauched. This only demonstrates that our tax system was designed in a haste is therefore is left with gaffes which requires a regular tweaking. “Frequent vicissitudes in tax rates not only burden the industry, but may also impact the economy in an adverse manner, as every change in tax rate will push swords of demand and supply to work out a new equilibrium price,” Mohan said.