India’s ambitious new tax regime, the goods and services tax (GST) launched in July 2017, was expected to fill the government’s coffers. Instead, it is turning out to be a pain point.
Last week, the government announced that it had breached the full-year fiscal deficit target of 3.3% of the GDP, with a little less than half-a-year to go. The fiscal deficit, or the difference between a country’s revenue and expenditure, is a key indicator of the country’s macroeconomic health. The target for financial year 2019 was Rs6.24 lakh crore ($88.45 billion), but in the April-October period, the figure already stood Rs6.48 lakh crore.
While prime minister Narendra Modi’s team believes it can still meet the full-year target by shoring up revenues during the rest of the financial year, economists are not very hopeful.
This is mainly on account of a drop in revenue collections from GST.
In the making for 17 years before it was finally implemented, GST is widely considered a step in the right direction. It replaced a multi-layered and complicated tax system. It could have boosted the government’s revenue by bringing more people into the tax net.
However, economists agree that it has not lived up to expectations when it comes to revenue receipts. Besides, there have been several upheavals since its launch.
Despite numerous tweaks to plug the loopholes, key issues remain in the GST, including the government’s tinkering with tax slabs, overestimation of revenue receipts, and compliance issues, to name a few.
To be sure, teething troubles were expected considering the GST overhauled the previous tax regime.
“For instance, the IT portal used for filing returns is still not working at its full capacity which has proved to be a hindrance,” explained Archit Gupta, CEO of online tax-filing company ClearTax.
Even though some people are filing their GSTR-3B, a monthly tax return form, they are not filing the GSTR-1 form as required, Gupta explained. The GSTR-1 is another monthly-returns form that confirms a taxpayer’s actual sales. “Even though it is mandatory, data suggests it is not being filed by all, and this step is important to reconcile that the returns filed are accurate as it has the sales detail,” added Gupta.
Meanwhile, the rates have also been tinkered with.
The GST replaced multiple tax slabs in different states with four central slabs—5%, 12%, 18%, and 28%— applicable throughout the country. Since its launch, products have been moved from one slab to the other. “Earlier, there were products that were taxed at 28% and have now been brought under the 18% tax slab, so revenue will obviously go down,” said MS Mani, senior director for indirect taxes at Deloitte India.
The system is also cumbersome. Right after the GST was launched, the government made several changes in the tax-filing process, forms, and rates, which led to confusion. This affected small businessmen and traders who were anyway grappling with increased compliance under the new GST regime. Even now, a lack of clarity on certain issues persists.
“The layman is still not clear about the refund status, which is a hiccup. Then, the return-filing is staggered and still seems very complicated,” said Bipin Sapra, partner, indirect tax at EY, one of the Big Four accounting firms.
Some experts have also raised doubts over revenue collections being pegged at Rs12 lakh crore for this financial year. “The government probably overestimated it and did not take into account the implementation challenges,” said another tax consultant, requesting anonymity.
Others believe that even the base for the estimations is unclear. “We don’t know on what basis the (revenue receipts) number has been arrived at; it should ideally be out for public scrutiny and to be studied,” added Sapra.
Moreover, even though the government has put in place certain checks and balances, such as the introduction of e-way bill which tracks goods movement electronically to avoid tax evasion, more needs to be done to plug the leakage.
The fiscal math
Apart from the bottlenecks in collection, rising crude oil prices and a depreciating rupee in the August-October period has also upset the government’s fiscal math. Since then, the rupee has strengthened and oil prices softened, though, which will provide some cushion to the government.
As for still meeting the fiscal deficit target of 3.3% this financial year, this will be possible only if the disinvestment target of Rs80,000 crore is met and if there is higher GST collections in the coming months, according to a report by the ratings agency CARE. However, it may take another six months for all GST related problems to be ironed out, believe experts.
“Nevertheless, the government has lowered its gross borrowings programme by Rs70,000 crore which will enable them to maintain the fiscal deficit target of 3.3%,” the CARE report stated.