One in every four items has seen a cut in tax rates over the thirteen months since the rollout of the Goods and Services Tax (GST), triggering concern among revenue department officials over its impact on overall government finances.
Officials assert that while the cut in rates — done over four rounds — is expected to result in procedural simplification, the prospect of meeting the average monthly collection of Rs 1 lakh crore in this fiscal is being seen as an uphill task, with the resultant cascading impact on the budget math for the full year.
The Reserve Bank of India (RBI), in its third bi-monthly monetary policy statement on Wednesday, also flagged the risk of fiscal slippage at both the Centre and state levels, saying it could have “adverse implications for market volatility, crowd out private investment and impact the outlook for inflation”.
Finance Minister Piyush Goyal, however, countered these apprehensions Wednesday, saying that higher compliance and increased market demand will ensure that there won’t be “any revenue shortfall”.
A senior revenue department official said: “Rate cuts are expected to further simplify GST, boost compliance but these have been more of a political call. If seen from revenue perspective, it will become tough to meet collection targets as we inch closer to the end of this financial year.”
The rate cuts on over 350 items out of total 1,211 items in the five broad categories of zero, 5 per cent, 12 per cent, 18 per cent and 28 per cent under GST are estimated to result in a revenue loss of about Rs 70,000 crore this year.
Though states will be compensated for the first five years under GST, a handful of states have expressed concerns about the revenue impact of the GST rate cuts. Rating agency Moody’s termed the GST rate cuts as “credit negative”.
“The tax cuts, which follow cuts in January 2018 and November 2017, will weigh on the government’s revenue collections and are credit negative because they will pressure the government’s fiscal consolidation effort, which is already diminished relative to the original fiscal deficit targets set last fiscal year. We estimate revenue loss from the most recent tax cuts to be about 0.04 per cent-0.08 per cent of GDP annually. Although the proportion of revenue loss is small, the vacillation in tax rates creates uncertainty around government revenue and comes amid persistent upside risks to its expenditures,” Moody’s said in a note Wednesday.
In the Budget for 2018-19, GST collections, including compensation cess, have been pegged at Rs 7.44 lakh crore, out of which the Centre aims to collect Central GST (CGST) of Rs 6.04 lakh crore and Integrated GST (IGST) of Rs 50,000 crore. In theory, IGST is supposed to be equally divided between Centre and the states. Adding State GST (SGST) collections equivalent to CGST would mean the total GST collections have been pegged at Rs 13.48 lakh crore, implying a monthly target of Rs 1.12 lakh crore.
So far, the government has collected Rs 3,89,567 crore from GST — Rs 1,03,458 in April (for March), Rs 94,016 crore in May (for April), Rs 95,610 crore in June (for May) and Rs 96,483 crore in July (for June).
At the Cabinet briefing, Goyal, in response to a query, said: “GST collections have just come in…they are well in line with our targets so far. Till monsoon months, during which economic activity is relatively lower, we still have the busy season ahead of us, so considering that we have very good collections on GST and given the buoyancy in the market, we expect after the major changes that have been carried out, compliance will improve in GST, market demand will increase and our own sense is that we won’t have any revenue shortfall. On the contrary, we are expecting to see revenue buoyancy and better revenues coming in the days ahead.”
Industry experts are also voicing apprehensions about revenue officials likely to undertake stern actions in the coming months as they would increasingly face the pressure of meeting the fiscal targets. “As has been already seen, such instances of tight revenue collection targets then lead to more show cause notices/investigations by the officials against the industry,” a Mumbai-based analyst said.
Since the rollout of GST from July 1 last year, the GST Council has undertaken four rounds of rate rationalisation —October 6, November 10, January 18 and July 21. The first significant rationalisation of the 28 per cent slab was done by the Council in its November meeting last year by removing about 178 items such as chocolates, chewing gums, detergents, shampoos, hair creams, fans, pumps, lamps, sanitaryware, wires, cables and bringing them to the 18 per cent slab, leaving only 50 items in the highest tax category. The rate rationalisation exercise in November was estimated to cost about Rs 20,000 crore a year.
In January, the GST Council approved rate cuts and clarifications for about 29 goods and 54 categories of services, estimated to cost Rs 1,000-1,200 crore a year. The recent round of rate cuts on July 21 has removed another 15 items such as washing machines, refrigerators, small screen televisions from the 28 per cent slab, leaving only around 36 items in the peak slab, an exercise expected to cost Rs 12,000-15,000 crore.
Additionally, the Council has also approved clarifications for 68 different categories of services which have led to lower rates on such services and subsequent lower tax collections. At the time of fitment of goods and services in the various GST slabs in May last year, the government had said that about 7 per cent of the total 1,211 items were exempted, 14 per cent of the items were kept in the 5 per cent tax slab, 17 per cent of total items were in 12 per cent tax slab. About 43 per cent of items were in 18 per cent tax slab, while only 19 per cent of the items were placed in the 28 per cent tax slab.
Now, only about 3 per cent of the total 1,211 items remain in the peak 28 per cent slab.