To what extent the GST Council’s move to ease the tax burden on consumers will pressure the fisc remains to be seen. Nevertheless, given how onerous the GST framework was turning out to be, it was imperative the returns filing schedule be made more lenient and tax rates be lowered. To that extent, finance minister Arun Jaitley, his team and the state finance ministers need to be congratulated for having responded to the grievances of taxpayers even if it means giving up some revenues. At this point, it is important the system does not intimidate assessees since the number of returns filed has been lower than expected, but it is picking up—as compared to the 6.5 million who were to file their summary returns for August, just 4.7 million have filed so far, but that number will increase over time. The increase in the ceiling for the composition scheme to Rs 1.5 crore, for instance, will make life easier for thousands of small businesses. Moreover, for close to 40% of the taxpayers whose tax liability is nil, filling out the form will be really elementary now.
And for the rest, too, the schedule is considerably easier—for assessees with a turnover of less than Rs 1.5 crore, the GSTRN1 for sales details needs to be filed just once a quarter and not every month. However, taxpayers with an annual turnover of more than Rs 1.5 crore need to file every month. While the sharp cut in tax rates across the board—only 50 items are left in the top 28% slab—might seem populist, it would nonetheless be disinflationary and spur consumption spending. More important, lower rates should encourage compliance and over time broaden the tax base. The cuts in the tax rates will give smaller firms—ancillaries or vendors—an edge over unorganised players since the pricing differential would now be lower; this should encourage formalisation.
To be sure, some measures taken by the GST Council, such as not allowing restaurants to avail of input tax credit, are seen to be distorting the format of the GST and also smack of the anti-profiteering law—in this case, the government decided restaurants were not lowering prices in keeping with the lower tax rates and so input tax credit was to be denied. On the plus side, the move has been accompanied by a lowering of the rate to 5% and it has been made uniform for all restaurants except those in 5-star hotels. The government estimates the loss to the exchequer, on account of the cut in the tax rates, at roughly Rs 20,000 crore or 0.12% of GDP, and if the losses materialise, the fiscal deficit could slip to 3.5% compared with the targeted 3.2%.
However as the finance minister observed, the lower tax incidence and the more liberal rules for filing returns should result in better compliance and better collections. So far, the monthly GST collections have been rising from Rs 94,063 crore in August to Rs 95,131 crore in October, after a dip to Rs 93,141 in September; analysts at Credit Suisse observe these numbers are healthy given Q2 tends to be seasonally weaker. As of now, though the shortfall in collections by the states—compared to the monthly target of Rs 45,000 crore—has narrowed to 24% in September and further to 17.6% in October versus 28.5% in August. Once, the IGST revenues are allocated to states and the claims for transitional credit of around Rs 90,000 crore are sorted out, a clearer picture of the revenues will emerge. Given the system is now easier to deal with, it is likely revenues will pick up.