The increasing pressure on GST collections and its fallout
The growing pressure on GST collections in a pre-election year would have serious implications on the government’s finances
Monthly revenue collections from the goods and services tax (GST) are improving, but adjusting for refunds, the mop-up is not very comforting. And the recent concessions are likely to exert more pressure on tax collections, pushing the fiscal deficit higher. Last week, GST Council cleared a proposal to incentivize digital transactions on a pilot basis via Rupay cards, BHIM app and the UPI system. Customers making payments through these platforms would get cashback of 20% of the total GST amount, subject to a maximum limit of ₹ 100.
While the intention is to promote a cashless economy, the timing may be wrong, especially because GST collections are still short of the required monthly run-rate of ₹ 1 trillion.
Going by the estimate of the group of ministers under Bihar deputy chief minister Sushil Modi, the revenue loss on account of this move would be ₹ 1,000 crore annually.
Although compliance has improved after the e-way bill implementation in May, contrary to expectations, tax collections haven’t seen a drastic increase (see chart).
Tax collections for June slightly increased to ₹ 96,483 crore from ₹ 95,610 crore a month earlier. However, collections for July are anticipated to get adversely impacted due to rate rationalization in the 28% tax slab. Last month, rates on 15 products such as vacuum cleaners, washing machines, paints and varnishes were reduced from 28% to 18% effective 27 July.
Rating agency Moody’s Investors Service has estimated the revenue loss from these tax cuts at around 0.04%-0.08% of India’s gross domestic product (GDP) annually.
The growing pressure on GST collections in a pre-election year would have serious implications on the government’s finances. According to Kotak Institutional Equities, the current run-rate in GST collections strongly indicates a revenue shortfall in fiscal year 2019 (FY19).
“Even if we build in an optimistic 8-10% quarter-on-quarter growth in the overall run-rate, there is likely to be a shortfall of around ₹ 300 billion (translates to around 15 basis points slippage in GFD/GDP),” it said in a report dated 1 August. A basis point is one-hundredth of a percentage point.
Meanwhile, in the June quarter, India’s fiscal deficit stood at 69% of the budget estimate for the full year, although lower than the 81% achieved in the same quarter last year. However, recall that GST went into operation only from July last year.
The government aims to trim the deficit to 3.3% of GDP in FY19, which would be a tall order unless GST collections revive sharply.
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