The rate effect on GST collections: Lower rates, moderate revenues, higher compliance

Published: February 18, 2019 4:01 AM

The budget estimate of GST collections for FY19 is Rs 13.48 lakh crore, with a monthly target of Rs 1.12 lakh crore.

gst, gst tax, gst collectionGST revenue for inaugural month July 2017 was Rs 94,063 crore.

G Gokul Kishore

Compliance issues under GST do not dominate public debate to the extent revenue collections do. Discussions in GST Council meetings indicate that both the Centre and states are concerned over lower GST collections. The causes and concerns deserve an analysis with certain caveats.

The budget estimate of GST collections for FY19 is Rs 13.48 lakh crore, with a monthly target of Rs 1.12 lakh crore. Since implementation, GST revenues have crossed Rs 1 lakh mark only thrice. A logical reason attributable to lower GST collections vis-à-vis the projections is constant reduction of rates. Two of the meetings of the GST Council were Budget-like, considering the sweep of tariff changes.

The tax rate on hundreds of items was reduced from November 15, 2017. The number of items under 28% tax slab was drastically pruned from 224 to just 50. If the commodity base of the highest tax bracket shrinks by one-fourth, then revenue consequences are unavoidable even if non-impacted high revenue items like cement are taken into account.

GST revenue for inaugural month July 2017 was Rs 94,063 crore. With increased registrations, revenue was Rs 93,141 crore in August and Rs 95,131 crore in September 2017. Utilisation of pre-GST credits carried forward through TRAN-1 form gained momentum, reducing cash payment for taxes and October and November 2017 revenues went down to Rs 83,346 crore and Rs 80,808 crore, respectively. December 2017 was the first full month after massive rate changes of November and GST collections stood at Rs 86,703 crore, a trend maintained with January 2018 collections at Rs 86,318 crore. Despite full-fledged TRAN-1 credit utilisation and wider and deeper rate reduction, GST collections did not become erratic. The dent was modest compared to the potential impact the changes could have caused. Similar trend was witnessed when rates were reduced on several items in July 2018 as GST revenue went down from Rs 96,960 crore in July to Rs 93,960 crore in August.

The reason behind revenue shortfall was officially explained as IGST being paid on intra-company, but interstate supplies and later when final supplies fructified, credit of the same was utilised, reducing net tax collection. The fall in overall incidence on most commodities and increase in ITC claims were also cited. As per a press release issued in September 2018, one of the main factors for the dip in revenues was probable postponement of sale of items for which tax rate was reduced in July; the time taken for the market to pass on the benefit and postponement of buying decision by consumers expecting the rate reduction benefit.

Going forward, the top slab of 28% will cover only luxury and sin goods, and rates of 12% and 18% may be merged and brought to 15%. All services attract uniform single rate of 18% and if the rate is brought down to 15% across the board, a significant impact on revenues is not ruled out. Tweaking tariffs alone may not help in pushing revenues beyond `1 lakh crore month after month consistently.

Liberalising credit availability in certain situations as per recent amendments will effectively reduce payment of tax by cash and pull down growth in revenues further. However, non-GST revenues like excise and VAT on crude, petrol, diesel, natural gas and ATF, along with stamp duty on real property, also need to be reckoned when tax revenues are analysed. When rates are reduced coupled with procedural relaxations, compliance tends to improve. This, along with higher consumption, can have a positive effect on growth of tax revenues as well. Tax revenue is a function of tax rates, taxpayer base and enforcement.

Widening the base

In February 2018, registrations under GST were 1.03 crore comprising of 87.03 lakh normal taxpayers and 16.42 lakh composition taxpayers. This represented a good increase vis-à-vis those who migrated from pre-GST regime, which stood at 64.42 lakh. As on December 2018, 1.16 crore taxpayers have obtained registration. If one were to reckon 17 lakh voluntary registrants despite being below threshold limit, the increase in the number of taxpayers reflects success in mainstreaming the unorganised.

As per return filing data, there was 50% increase in the number of indirect taxpayers (January 2018). As per Economic Survey 2017-18, there were 98 lakh unique GST registrants (slightly more than those under pre-GST regime). However, the percentage of those who obtained registration but did not file return and did not pay tax stood at 14.21% in July 2017, jumping to 28.75% in November 2018. Among composition taxpayers, 15.03% were non-filers in July-September 2017 as compared to 25.37% in July-September 2018.

Cessation of business could be a reason for default in filing returns and tax payment. Compulsory migration of VAT dealers with a meagre turnover could be another reason. The decision to increase threshold limit to Rs 40 lakh will mean contraction of the base but without major impact on revenues. Resolving issues like technical glitches, lack of exposure of trade to IT systems and absence of robust offline utility, along with preference for purchases from registered vendors for ITC benefit and voluntary registration of small business, can be the drivers to widen the base.

Tax evasion

During April-October 2018, evasion of `38,896 crore was reportedly unearthed. Availing input tax credit without receipt of goods continues to be widely reported. Non-reporting of supply resulting in outright evasion, under-reporting of supply by mis-declaration and undervaluation leading to lesser revenue and fraudulent reporting to confer undue ITC benefit to recipient are not new. Such modus operandi was prevalent in earlier regimes as well. But GST being a new tax, avoidance is being looked at with new eyes.

As compliances are online, access to data is seen as the reason for the higher figure of revenue leakage getting reported. When tax rates converge towards the median rate, incentive to evade shrinks. System-based verification, matching between parties for ITC and making recipient also liable to tax if supplier defaults may check evasion. Scrutiny of returns and audit of records by the department have not yet started. These checks aided by data analytics can be effective in deterrence. Use of data on tax compliance behaviour may also bring moderate success in plugging revenue leakage.

The author is an advocate with Lakshmikumaran & Sridharan. Views are personal

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