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.