Tax rates that are lower than revenue neutral levels, coupled with the sluggish economic growth, have ended up impacting revenues, Finance Secretary Ajay Bhushan Pandey said, adding there are no intrinsic structural issues with the indirect tax regime. In an interview with Aanchal Magazine, Pandey, who holds charge as Revenue Secretary, said rate rationalisation, correction of inverted duty structure have been discussed in the GST Council and the decisions about these will be taken in the next 8-9 months. Edited excerpts:
How do you see resolving the deficit in the compensation cess fund?
Tax collections are reflective of tax rate and economic activity in the country. In the pre-GST regime, on an average, most items were suffering a tax rate of more than 31 per cent. The revenue neutral rate was decided at 17-18 per cent, but today the average GST rate is 11-12 per cent. Many items are exempted. Most items are at a lower tax rate than earlier. Yet, average monthly collection in the first year of GST was Rs 89,000 crore, in the second year it came to around Rs 97,000 crore and last year it was more than Rs 1 lakh crore. This is despite the fact that the rates on many items were reduced in the first, second, and third year.
Also, in FY20 (July-September), there was lower economic activity, even then average tax revenue last year was Rs 1 lakh crore. Last year, the FY20 nominal GDP growth rate was 7.5 per cent but the domestic GST collection, leaving aside the import part as GDP growth and tax growth can be compared on domestic collection, was around 9 per cent — better than GDP growth. The perception that GST revenue has not grown, thus leading to a compensation gap is not correct.
What one has to understand is that the collection is down due to rates that are lower than revenue neutral rates. Also during last year and this year, the slump in economic activity is reflected in GST collection. In the current situation if GST had not come, would the VAT revenue have grown by 14 per cent? So, therefore, it is not correct to infer that because of GST, revenue has declined.
The way we are using data analytics to target those who are at the fringe of the law, the collection has been and will be higher than GDP growth. However, in Covid-19 situation if the collection is less than 14 per cent growth rate, then the question is how to bridge the compensation gap. The answer is in the GST Compensation Act itself, which says that the compensation would be paid out from the compensation fund and the solution has to be found by the GST Council, which discussed this in the last 2-3 GST Council meetings. The GST Council will take appropriate decisions on this.
Is one of the options on the table about less than 14 per cent growth rate as is in the compensation law?
It will be very premature for me to say what GST council will decide.
Putting it another way, in retrospect, was 14 per cent too high an asking rate for compensation?
Supposing the economy had grown at 12 per cent, then of course, 14 per cent was achievable. But supposing the economy grows only at say 5 per cent or 6 per cent, then of course the 14 per cent (is high). Say, the growth was happening at 12 per cent and if the GST collections were growing at 5 per cent, then it would have been a cause of worry and meant some GST implementation problem. But as long as GST collection is growing at a higher rate than the economic growth, then it means that the problem doesn’t lie so much in the GST implementation and then it is on account of lower economic growth. And, then one has to look for certain solutions that how do we manage till the economy picks up, what is the kind of solutions which people can arrive at and all those things will be looked at by the GST Council.
In this year, going forward, what could be the top reforms under GST in the coming six months?
We have to improve the taxpayers’ experiences, if there are problems, however small it may be, it may be affecting even one taxpayer, we have to ensure that he also gets as smooth an experience as anyone else… and for that we are constantly working with Infosys.
On the larger policy questions, such as inverted duty structure, or rate rationalisation, the good thing is that over the last few months, several groups have been constituted under the GST Council. Those discussions are going on. Some decisions have been taken and more and more decisions will get taken as we go forward. This is a continuous exercise and hopefully within the next 8-9 months, many such decisions will be taken.
Including rate rationalisation?
This is something being discussed. The entire GST Council is very sensitive to the needs of the industry and accordingly they take an appropriate decision whether it is rate rationalisation, or inverted duty structure or whether it is further simplification.
One of the major problems in three years of GST has been the functioning of the online portal, GSTN. In the December meeting, Nandan Nilekani was there and he agreed to be part of every meeting thereafter. He was given deadlines for some of the projects to be finished by July, obviously everything has been shut down or put on the back burner. How will that continue?
It is not correct to say that systems have been shut down. First of all, we must understand that GST is a very transformational IT project not only from the economic point of view but also from the sheer IT part. There is no such parallel in the world where 1.24 crore people file their tax returns completely online without any manual interface. Now, when you have such a large IT system, then there would be some problems at some places, where we need to continuously improve. But at the same time, we cannot say that GST has been problematic, otherwise how else 46 crore returns have been filed during the last three years, 1 crore returns are being filed every month, Rs 1 lakh Crore rupees are being collected every month. Agreed that there could be some problems at a certain end, and that’s where we have to concentrate our efforts so that those problems are minimised. And eventually brought down to zero. There should be a situation where there should be zero error, no one should face any problems. If you compare three years back, and then compare to next year and to what we do now, the problems are showing the declining trend…the question is that we have to hasten the speed of improvement and the problem should go away at a faster rate. The GST Council through law committee, implementation committee where state government and the central government officers together work to find out solutions.
Also, we are working with our technology partner Infosys, and Nandan Nilekani. The amount of time he’s spending on improving the system, we are thankful to him. That’s something which we need to work further upon and I am sure that over the next few months, we will continue to improve further and the taxpayers’ experience will be better.
You mentioned use of data analytic and artificial intelligence. Revenue leakages have been among the major concerns. How has the trend been lately?
All three systems — income tax, customs, and GST — are now talking to each other. During the last 7-8 months, we have been using data analytics to see who the people on the fringe of the law are. Largely, taxpayers are compliant and they voluntarily pay tax. But if there are some people who do not pay less tax than what they should be paying, they are impacting the competitiveness of those who are paying taxes. And therefore, the whole challenge is to use technology to actually pinpoint and do a targeted identification of those who are on the fringe of the law.
Based on data analytics, during the last 7-8 months we have generated red flag reports in respect of a few thousand entities where tax evasion would be taking place; our success rate has been more than 70 per cent, which is further improving.
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