The revenue loss is equivalent to 2.4% of GDP or 40% of the GST collection target
GST authorities have zeroed in on about 40,000 companies for claiming excess or wrongful tax rebates
New Delhi: he government may be losing ₹5 trillion in indirect tax revenue a year, amounting to 40% of its goods and services tax (GST) collection target, because of defaults and evasion, according to the Fifteenth Finance Commission (FFC), confirming policymakers’ fears that businesses are not paying their fair share of taxes.
In a recent presentation made to the GST Council, FFC has assessed that the revenue loss was equivalent to 2.4% of gross domestic product (GDP). This works out to ₹5 trillion if one goes by the first advance estimate of nominal GDP for FY20 released earlier this month. This is as much as 40% of the GST revenue Centre and states together may collect this year, going by the trend of an average ₹1 trillion a month GST revenue in the first nine months of this fiscal.
In the nine months to 31 December, central and state governments have collected more than ₹9 trillion in GST and hope to collect another ₹3.55 trillion by March-end.
FFC’s estimate of revenue loss from non-compliance is giving a strong backing to the tax administration’s bid to tighten enforcement at a time it is struggling to meet the revenue targets for the year. According to FFC, India’s overall tax-to-GDP ratio is about 17.2%, which, as per its calculations, should be about 22.6%. There is a gap of about 5.4%, of which GST compliance gap accounts for about 2.4% of GDP, according to the FFC presentation, the highlights of which are now available in public domain from the minutes of the meeting.
A team of economists from the International Monetary Fund (IMF) on Friday gave a presentation to FFC on resource mobilization over the next five years, with special focus on improving the revenue realization from GST. The IMF team presented that the current collections were significantly below an estimated revenue frontier for the country. “It was further discussed that rationalization of the rate structure as well as improvements in compliance and collection efficiency of GST and other taxes can move India much closer to the frontier," a statement by FFC said.
What has led to the GST revenue gap is the slowdown in consumption, raising the threshold for GST registration to ₹40 lakh in sales from the original ₹20 lakh, a series of tax rate cuts, raising the threshold for small businesses to register for a concessional tax scheme from ₹1 crore to ₹1.5 crore and instances of tax evasion. Besides, there have been several extensions of the deadline for filing annual return for the first year of GST—FY18—the latest being 31 January 2020. “Invoice matching is supposed to be the soul of GST, which has not happened the way originally envisaged. This feature of GST would have ensured better compliance," a government official said on condition of anonymity.
According to Indira Rajaraman, economist and former member of the Thirteenth Finance Commission, both the GST revenue slump and the economic slowdown could be traced back to the hardships that small businesses have suffered in the GST regime.
“The vibrancy of the Indian economy and its job creation potential depended on small, informal businesses to a large extent," Rajaraman said. “The snapping of the relation between these small businesses and their larger counterparts on account of various factors including their fear of coming into the formal system and having to deal with tax authorities have contributed to both the economic slowdown and the slump in GST revenue receipts."
The government has taken a series of steps towards revenue augmentation, which includes cancellation of registration, blocking of e-way bill and restriction on use of tax credit in certain circumstances.
In recent months, the Central Board of Indirect Taxes and Customs has started a crackdown against misuse of tax credits and GST evasion. The drive against GST fraud comes at a time central and state governments are facing a revenue shortfall amid an economic slowdown at its worst in 11 years.
GST authorities have now zeroed in on about 40,000 companies for claiming excess or wrongful tax rebates, which will now be pursued for recovery of tax dues. A ministerial panel led by Kerala finance minister Thomas Isaac is exploring ways to curb evasion of GST on gold. The measures would include mandating electronic permits for transportation of the metal.