Cen­tre might miss its fis­cal deficit tar­get for the year: Kan­abar


Goods and ser­vices tax (GST) col­lec­tions hit Rs92,283 crore in July, sur­pass­ing the tar­get in the very first month since the roll­out of the in­di­rect tax. Di­nesh Kan­abar of Dhruva Ad­vi­sors and A. Prasanna of I-sec PD dis­cuss the im­pli­ca­tions in an in­ter­view. Edited ex­cerpts: What is the sense about the num­ber it­self? Is it a ma­jor out­per­for­mance ac­cord­ing to you and what is the full-year fis­cal math look­ing like? Prasanna: It is a bit dif­fi­cult to draw too many con­clu­sions from this num­ber be­cause it is just the first month and I think, like the fi­nance min­is­ter pointed out, com­pli­ance is still low. Se­condly also, the in­put tax credit sys­tem is not fully work­ing and maybe some com­pa­nies have been able to file re­turns in toto and they have been able to get cred­its, but a large part of the sys­tem may not have been able to do it, par­tic­u­larly for pro­duc­tion which was car­ried out in the pre­vi­ous month and for which still some in­put tax credit is pos­si­ble. So be­cause of which, we do not think too many firm con­clu­sions can be drawn. The num­bers we are work­ing with is on a monthly av­er­age and of course, this av­er­age is just a rule of thumb by any given month, the num­bers will vary sig­nif­i­cantly be­cause of sea­son­al­ity and other fac­tors. But we are work­ing with a monthly av­er­age of around Rs1 tril­lion and if you com­pare this num­ber, I would say it is a rea­son­ably good num­ber given the caveats which we have ex­pressed.

So be­cause of com­pli­ance issues, ac­tu­ally the num­ber can go up, but also be­cause of in­put tax credit, there will be some de­crease also from the fi­nal col­lec­tion. So if you put the two to­gether, we are pretty much in the ball­park where we should be, but then if you look at the dis­tri­bu­tion from what­ever num­bers which have been put up, it does look the states are, at least in the early stages, the states seem to be do­ing bet­ter and there is still some short­fall as far as cen­tre’s rev­enues are con­cerned.

Now this is a con­cern which you have been hav­ing for quite some time now. We think... to make sure the GST is a re­al­ity, the cen­tre has given quite a bit of its tax rev­enues to per­suade the states, so at least in the first year, we do think that the cen­tre is fac­ing some short­fall at the over­all fis­cal level. And to that, if you add the other issues like short­fall in tele­com spec­trum rev­enues for ex­am­ple, lower RBI div­i­dends, there could be some stress emerg­ing on cen­tre’s fis­cal this year. In fact, we think that it is quite a good prob­a­bil­ity the cen­tre might miss its fis­cal deficit tar­get for the year.

How did you read this Rs92,000 crore odd fig­ure and some of the points that we have just heard the other pan­el­lists raise par­tic­u­larly on the ac­tual num­ber? Once you take the in­put tax credit into ac­count, then what is the gov­ern­ment re­ally left with and is that look­ing like a com­fort­able fig­ure or not? Kan­abar: I think there are three ba­sic things which we need to take into ac­count. The first and fore­most is that July was an ab­nor­mal month in the sense that there was a huge amount of sell-off which hap­pened in the month of June in an­tic­i­pa­tion of GST. And there­fore, the sales in the month of July, I would like to be­lieve, are not nor­ma­tive sales which we would oth­er­wise have seen.

Num­ber two, the com­pli­ance is­sue—they have been spo­ken about, but let me tell you as a prac­ti­tioner. We found it ex­tremely dif­fi­cult to log on to the site and re­ally load the de­tails. It was a night­mare; there were peo­ple work­ing through the week­ends, etc. There are teething trou­bles, I am not be­ing un­duly crit­i­cal or scep­ti­cal about them, but the fact is that the com­pli­ance which we saw in the month of July and the com­pli­ance which we are likely to see go­ing for­ward are go­ing to be very dif­fer­ent.

And third of course, the elephant in the room, what about the cred­its? The in­put cred­its could be very sub­stan­tial. If I look at the credit then I would have been very dis­ap­pointed. On the other hand, when I look at the fact that July was not a nor­ma­tive month, not ev­ery­body has been able to en­sure com­pli­ance, I think it is a very dif­fi­cult guess, but this looks like a rea­son­able way for­ward to me.

If you could re­act to that, more im­por­tantly, ac­tu­ally we got a neg­a­tive PMI num­ber, a con­trac­tion of ac­tiv­ity in July. So, is that not also a caveat that the num­ber is un­der­stated be­cause eco­nomic ac­tiv­ity was weak in July and there­fore the ex­trap­o­la­tion for other months should ac­tu­ally be higher, also more reg­is­tra­tions have come in in Au­gust; also, the sys­tem will hope­fully work bet­ter in the months to come as Di­nesh Kan­abar is point­ing out. Given that, are you still so wor­ried about the fis­cal deficit? In fact I thought that col­lec­tions are so good that In­dia could be on the verge of a rat­ing up­grade... Prasanna: Two points here, now as far as the monthly num­ber is con­cerned and the first month num­ber is con­cerned, I think what you are say­ing is right. For the rea­sons you pointed out that in July ac­tiv­ity lev­els were quite muted, there will be a pickup and like you said, the com­pli­ance will also go up. So it is pos­si­ble the num­bers ac­tu­ally im­prove.

So, our con­cerns are not com­ing from this monthly num­ber per se, but from the over­all math for the year if you look at it, the to­tal tax col­lec­tion which the cen­tre was col­lect­ing pre-gst, what the states were col­lect­ing, how that pie is go­ing to be dis­trib­uted, and we are talk­ing at a macro level, not in terms of the ac­tual num­bers, but the de­sign of GST it­self is what we are talk­ing about. In that de­sign, our un­der­stand­ing is cen­tre has given up around 0.5% of GST in the form of cesses to be col­lected.

These are not cesses which were levied after GST. These are cesses such as clean en­ergy cess which were there pregst also; that has also been given up by the cen­tre. So if you take that into ac­count, there will be a short­fall for the cen­tre. Now that short­fall can be met if there is a sig­nif­i­cant buoy­ancy in tax col­lec­tions go­ing for­ward. Now, again, since this is the first year and like it has been pointed out be­cause of teething trou­bles, if it is go­ing to take more time for com­pli­ance issues to be sorted out, for in­put tax credit, those issues to be sorted out, maybe in the first year one should not be too op­ti­mistic of buoy­ancy. That will prob­a­bly kick in from the sec­ond year on­wards. So that is the rea­son why we are wor­ried for the cen­tre.

Of course like I pointed out, you also add on the fact that RBI has given a lower div­i­dend, tele­com com­pa­nies are go­ing through some stress. So their spec­trum pay­ments will go down. Also the hous­ing al­lowance of the pay com­mis­sion, it was not clearly bud­geted. So there has to be some ex­tra pay­ment on that also. So our cal­cu­la­tion, if you put all this to­gether, is there is a short­fall of around 0.9% of GDP. Of course we are not say­ing that is the slip­page—that is the ex­tent of slip­page we are pen­cil­ing in; we think cen­tre will be able to man­age by cut­ting back on some spend­ing, maybe there will be bet­ter tax col­lec­tions on di­rect tax front.

Still we think 3.2% is ex­tremely dif­fi­cult. Our house view is this year the fis­cal deficit could print at 3.5% of GDP and be­cause it is a year in which GST has been in­tro­duced, I don’t think it is such a big is­sue, I think the cen­tre should be able to in­voke that es­cape clause which the FRBM panel ad­vo­cated and I think they should be able to ex­plain it to the mar­ket and mar­ket should take it in their stride. The math with re­gard to this com­pen­sa­tion cess, now the data told us that around Rs7,200 crore was col­lected. The ques­tion that every­one is won­der­ing is whether cur­rently the com­pen­sa­tion cess that is be­ing col­lected will be enough to not re­quire a huge in­crease on the tax on lux­ury cars and some of the other de­merit good items. There is a cab­i­net meet­ing, there is a buzz that it is go­ing to go up to 25%, but how does the math look like right now?

Kan­abar: I think Rs7,900 crore is far be­low what was orig­i­nally bud­geted. I think cess is go­ing to be a mov­ing part un­like a GST which I don’t see chang­ing month-on­month. There will be mar­ginal tweak­ing here and there but cess is al­ways go­ing to be a mov­ing part and de­pend­ing on how things are mov­ing.



Dhruva Ad­vi­sors CEO Di­nesh Kan­abar.

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