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Poor tax revenue growth plays havoc with government’s fiscal maths

1 min read Gireesh Chandra Prasad 24 Dec 2019, 01:12 PM IST

The Central government this year is staring at a 40% shortfall in the funds raised through a cess on sale of luxury and sin goods that is used for compensating states
Union and state governments are collectively facing revenue losses from tax refunds

This shortfall, the federal indirect tax body was told, cannot be bridged by raising the cess rate or by levying cess on more items (iStock) — This shortfall, the federal indirect tax body was told, cannot be bridged by raising the cess rate or by levying cess on more items **(iStock)**

NEW DELHI : Flaws in the Goods and Services Tax (GST) rate structure and the economic slowdown are burning a big hole in the finances of central and state governments this fiscal.

The Central government this year is staring at a 40% shortfall in the funds raised through a cess on sale of luxury and sin goods that is used for compensating states. Also, Union and state governments are collectively facing revenue losses from tax refunds claimed by businesses due to flaws in GST rate structure, according to a presentation made before the GST Council last week.

The presentation on revenue trends so far this year showed that the Central government is facing a shortfall of ₹63,200 crore in cess collection assuming a 5% growth in collection from a year ago. It needs to collect ₹1.6 trillion in cess revenue this fiscal to meet states’ shortfall in revenue collection, said a government official, who spoke on condition of anonymity.

This shortfall, the federal indirect tax body was told, cannot be bridged by raising the cess rate or by levying cess on more items. If the current revenue growth trend continues, central government’s fund requirement for compensating states would go up to ₹2.28 trillion and the shortfall of cess could double to ₹1.26 trillion next fiscal.

In addition to this, Union and state authorities together are facing a ₹20,000 crore revenue loss due to refunds claimed by businesses because of flaws in the GST rate structure. With the tax liability on certain finished products sold to consumers remaining lower than what is paid on raw materials and services that go into their production, businesses claim refunds of the extra taxes paid. This problem, called the inverted duty structure, is prevalent on items like fertilizers, mobile phones, renewable energy equipment, fabrics, edible oils and bicycles, the Council was told.

The Council, however, did not venture to correct the duty structure by raising the tax rate on the final products facing inverted duty structure at its 38th meeting last week as the economy faces a deep slowdown marked by a demand slump. Central and state ministers are now putting their heads together to fix the problems in GST and improve compliance.