Insights into Editorial: GST’s performance versus promise
The launch of the goods and services tax (GST) across the country. Billed as the biggest tax reform since independence, the landmark tax reform, with its first of its kind ‘one nation-one tax’ approach, aimed at subsuming almost all indirect taxes at the Central and State levels.
The GST revenue picture has assumed great importance. The fiscal projections and the ability to fund welfare schemes hinge on this.
The widespread perception that the GST revenue growth has not done well is unfair as the GST revenue performance should not be measured against the ambitious targets set, but against the growth of the nominal GDP.
First-year, First show:
In the first year of implementation of GST, revenues grew by 11.9% and the buoyancy was 1.2.
A buoyancy ratio over 1 shows progressiveness in the revenue growth and opens up the prospect of a rising tax-to-GDP ratio.
This is a significant improvement over the pre-GST period when the buoyancy ratios for State value added tax (VAT) and Central indirect taxes like central excise and service tax were less than 1.
The revenue performance is especially creditable given the transitional difficulties during implementation and teething technical problems with the GST network (GSTN).
Some other analyses show that the tax-to-final consumption expenditure also grew from 10.3% in the year before GST (2015-16) to 11.9% in 2017-18.
However, the State-wise picture shows that some States did better than the others. The States that had a high percentage of origin-based taxes in subsumed revenues — Bihar, Chhattisgarh, Himachal Pradesh, Punjab and Odisha were found to lag behind in subsequent revenue performance.
The Tax buoyancy of GST revenue was 1.2:
The relative buoyancy of GST revenue compared to the pre-GST period is not surprising. This is a result of two factors.
One, the design of GST integrated the entire value chain from raw material to retail for the purpose of indirect taxation.
This design reduced non-compliance in downstream trading, as these entities chose to register to avail of the input tax credit generated upstream.
The GST revenue growth will reach a steady normal rate only when the effect of the transitional credits are extinguished.
Monthly CGST revenues are slowly inching towards monthly SGST revenues the utilisation of the transitional credits has a greater impact on the CGST rather than the SGST. It is for this reason that GST revenue buoyancy is likely to do much better in the coming year.
Tough rules to prevent GST evasion:
The federal indirect tax body, at its first meeting, also decided that Aadhaar-based GST identification will now be sufficient for GST registration.
Aadhaar-based registration will not only simplify the process but also improve ease of doing business, as the entities will not be required to submit any other document to enrol.
As part of its anti-tax evasion measures, the Council said that if businesses and merchants guilty of pocketing the benefits of tax cuts meant for consumers do not return the amount amassed illegally within 30 days, they will have to pay a 10% penalty of the profiteered amount.
They have to return the entire amount to the consumer or deposit the money in the consumers’ welfare funds.
Despite demands of tax cuts from the industry, the Council focused on anti-evasion measures and simplification of rules.
Proposals to slash tax rates on electric vehicles, battery chargers and leasing of electric vehicles were referred to the fitment committee for consideration. On taxation of lotteries, the Council decided to seek the attorney general’s view.
Policy measures needed in the Way Forward:
- First, the revenue performance of the composition dealer has been disappointing.
- Therefore, the imposition of duty on the composition dealers levied on the Reverse Charge Mechanism (RCM) basis could be an important anti-evasion measure going forward.
- Second, the introduction of the new GST annual return form and matching of invoices will substantially improve compliance.
- Third, the GST taxable base must be expanded to include petroleum products (especially aviation turbine fuel and natural gas in the first round), then bring in real estate and electricity.
- Fourth, greater coordination between investigation agencies in the CBDT and CBIC could yield better results.
- The I-T department has already incorporated GST registration and turnover information in their return formats.
- Finally, the policy to improve revenue buoyancy has to be data driven.
Today, detailed sector-wise analysis of revenue is hampered by lack of separate data on the sectoral profile of the new registrants and of separate revenue trends for goods and services.
There is a perception in many States that revenue from services has lagged expectations. This can be rectified by a small modification in the format of the GST annual return.
This modification would require companies to indicate the HSN (Harmonised System of Nomenclature) code in eight digits in respect of goods supplied by them and accounting codes of each of the services provided.
A further surge in GST revenue will happen once land and real estate is brought under the GST net.
This will clean up the land market and the revenue gains will be more on the direct tax side as more transactions are reported under GST.
The implementation of GST similarly has seen transitional difficulties coming to the forefront in the initial period. Hopefully, in future, we will see the GST yield more of the promised nectar.