At Rs 1.14 lakh crore for March 2019, GST collections for the month were 10% higher than those a year ago, and the highest since India started collecting this tax in July 2017. To that extent, we have a rosy picture of GST collections being on a firmer footing as more and more firms are getting GST-compliant. Yet, if the picture were so idyllic, there wouldn’t be a shortfall of Rs 1 lakh crore in central GST collections alone in FY19. Indeed, there could be a large shortfall in FY20 GST also, if the March 2019 collections aren’t replicated or even increased over the next 11 months. While it is theoretically possible that future tax rates will at least equal this, it remains true that GST collections are usually higher at the end of each quarter—smaller firms file their returns every quarter—and also at the end of the financial year; the impact for March 2019 was even higher because that was also the last month to claim tax credits for FY18.
Should there be a large shortfall in FY20, it will be because of the fairly large tax evasion that continues to take place, possibly also because invoice-matching continues to be in abeyance; a combination of the hardware system not being fully ready and the government not being too keen to upset taxpayers before the election was the main reason for this. Indeed, while GST collections rose by just 9% in July 2018 to March 2019 over the same period a year ago, nominal GDP rose by 11.5%. And this is despite the fact that, over the same period, the number of tax-filers rose by as much as 24%. Given this points to fairly large-scale tax evasion, it is not surprising that the government has approached the Supreme Court asking for permission to arrest people for GST evasion, provided there is enough proof of this. While it is not clear how SC will rule on this, in a related case, the Telangana High Court had held that a person can be arrested in case the authorities felt there was tax evasion, and when this ruling was challenged before the Supreme Court, it was upheld.
The power of arrest, however, needs to be used with great care since it can just as easily become a source of corruption as well as tax terrorism; given the possibility of arrest, most are likely to pay what the taxman wants and then go into appeal. So, while various tax departments have, in the past, laid out principles for such arrest, and the arrest can also only be ordered by very senior officials, the review process needs to be more stringent and should involve tax professionals who do not work with the government. Indeed, apart from keeping a 24×7 watch over such cases, the tax department must examine the rationale given for arrests and also keep in mind the success of the tax demands made; if most tax demands fail to stand the scrutiny of the judicial process, then using the power of arrest only adds to tax terror.