The disjunct between the promise and reality of GST
It has not led to the expected boost in growth. States often receive compensation late. And shortfall is common
The Goods and Services Tax regime completed three years on July 1. The concept of GST came in 2005 when the Vijay Kelkar-led task force submitted its report and recommended the replacement of all indirect taxes with GST. Even earlier, then finance minister Yashwant Sinha constituted a seven-member Expert Group on Taxation of Services as per his budget speech for FY2000-01. The expert group led by M Govinda Rao submitted its report in March 2001. The group made the first recommendation on GST. The dream became a reality when the new tax was introduced at the midnight of June 30 and July 1, 2017.
It was introduced as the biggest tax reform for indirect taxes. But unfortunately, it has failed to live up to people’s expectations. To remove glitches, the government has made 697 changes in GST since its inception by issuing notifications related to rates, the amendment of rules and waiver of penalty. Besides this, 146 circulars and 19 orders have been issued so far on various issues.
It was expected that the introduction of GST would increase the Gross Domestic Product (GDP) of the country because a simplified tax structure will eliminate the cascading effect of taxes and increase government’s revenue. While there may be a set of complex factors that have led to a dip in growth, the fact is that the expected boost has not happened. The growth rate of GDP of Q4 of FY20 has declined to 3.1%. The growth rate of GDP for FY20 has fallen to 4.2% — the lowest in the last 11 years.
The coding of goods under various Harmonised System of Nomenclature (HSN) brackets has always been a challenge for the GST council. Take this example. In the recent past, the Authority for Advanced Rulings (AAR)-Karnataka bench has said that 18% GST will be levied on parathas and roti will be taxed at 5% of GST slabs rate. The AAR has ruled that a paratha is different from a roti. The same problem arose with the rate of tax on hand sanitiser. The AAR-Goa bench established that alcohol-based hand sanitisers will be taxed at 18%. Hand sanitisers are essential in the Covid-19 battle. While the GST Council has made efforts to resolve such issues, the fact that they keep recurring is a sign of the weakness of the system.
Various states were ready to hop on to the same boat on the condition that the central government would compensate their revenue loss for the first five years. Accordingly, a provision was made under section 7 of GST (Compensation to State) Act, 2017. As per the provision, the loss of revenue will be compensated at the end of every two months for five years. When states were fighting against the pandemic and struggling for revenue in the middle of the lockdown, the Centre did not release compensation money, which had not been paid since November 2019. The Centre only released ₹36,400 crore on June 4, due to the states and Union territories for the period starting from December 2019 to February 2020. The government further released ₹13,806 crore for March 2020 on July 27, and paid all dues for FY20. The amount for April-July for FY21 is still due. While states need the compensation, the Centre seems to lack the resources to meet its commitment on a consistent basis.
On the revenue front, there was an unofficial target to collect ₹1 lakh crore GST every month. The average collection was ₹89,885 crore in FY18, ₹98,114 crore in FY19, though this improved to ₹101,845 crore in FY20. The total revenue collection was ₹ 7.19 lakh crore in the first eight months of FY18. The total revenue collection was ₹ 11.77 lakh crore in FY19 and ₹ 12.22 lakh crore in FY20.
There was no budget provision made by the central government for FY18. The revised estimate was made of ₹4.44 lakh crore. But the actual realisation was ₹4.42 lakh crore. The government had made a budget provision of ₹7.43 lakh crore for FY19. The target was revised downward to ₹6.43 lakh crore in the midterm budget review for FY19. However, the actual realisation was ₹5.81 lakh crore. The government has made a budgeted estimate of ₹7.61 lakh crore for the collection of GST for FY20 in the interim budget. However, finance minister Nirmala Sitharaman’s revised budget estimates to ₹6.63 lakh crores in her maiden budget speech for FY20. The target was further revised to ₹6.12 lakh crore. All these figures show a consistent overestimation of the collections.
The government has already set a budgeted target of ₹6.90 lakh crore for FY21. The collection for the first four months for FY21 is ₹32,172 crore, ₹62,151 crore, ₹90,917 crore and ₹87,422 crore respectively. The signs are clear. There will be a shortfall again, making the reality of GST more sobering than the promise of GST.