The Revenue Jigsaw

The many unresolved issues in the Goods and Services Tax (GST) have thrown the government’s forthcoming Budget projections out of gear.

The many unresolved issues in the Goods and Services Tax have thrown the government’s forthcoming Budget projections out of gear

It is official now. The April 1 roll-out of GST is off the cards, and it is likely to be deferred to July 1 this year. Besides, there are uncertainties regarding the final shape of GST. Amid such apprehensions, the estimates of total tax collection – especially those of indirect tax – in the Budget may go off target by a fair margin. It’s not to say that revenue projections in Budgets are never offtarget – almost every year, the estimates are revised – but for the next financial year, the tax collection estimates would be clouded by ‘unprecedented’ events like GST and demonetisation, the former being the biggest disruptor.

The GST Cloud

GST is a complete overhaul of the indirect tax system that will not only change the rates at which many of the goods and services are being taxed now, but also lead to more individuals coming into the tax net. However, this piece of legislation has been hurried through to meet the deadlines without addressing many of the open issues. The April 1 rollout would have made Budget preparations easier as most of the indirect tax proposals would have been taken care of by the GST Council – a body comprising states and Central finance ministers that takes important decisions such as fixing rates on GST.

However, last minute negotiations and hard bargains by various states have delayed the implementation (by at least a quarter). Even as the government is trying to hurtle past the finishing line, unresolved issues continue to linger.

“How do you make any kind of estimates when you do not even know when the GST would be implemented,” asks Madan Sabnavis, Chief Economist, CARE Rating.

Aditi Nayar, Principal Economist at rating agency ICRA, says that if GST was being rolled out on April 1, it would have been the easiest scenario for the government to make any estimates in the Budget, because then they would have to just make the GST estimate, and that too for the full year. “Now it’s more complicated. We have a combination where there would be existing indirect taxes for one part of the year, and GST for the rest of the year,” says Nayar.

The uncertainty over the date is just one of the hindrances. Although the GST Council has agreed on four rates – 5 per cent, 12 per cent, 18 per cent, and 28 per cent – it is yet to decide the different tax bands in which goods and services would be placed. Apart from these rates, there would be exempted goods and zero-rated goods under GST. The government’s plans to levy differential cess on goods that fall under the peak rate have muddied the waters.

The revenue sharing formula with the states is another issue that may not directly impact the tax collection estimates of the government, but could impact its other Budget estimates such as revenue and fiscal deficits. While the integrated GST would be collected by the Centre, and the state GST by the states, the Central GST would be collected by the Centre and shared with the states.

“While revenue sharing is not a big concern for states, as the Centre promises to compensate any loss of revenue to states in the first five years, it is certainly a big concern for the Centre which is not making much noise about it at present. The compensation would come from the Centre’s coffer,

and it has nowhere to go if its own revenues fall short,” says M.S. Mani, Senior Director, Indirect Tax, Deloitte India.

Wild Guess

For many economists, making a tax collection estimate for the next financial year, given the unpredictable environment, is like shooting in the dark. Nonetheless, the government has to do the job.

Mani says that the government could make an estimate based on the existing indirect tax laws, and the changes in tax rates it plans to bring in the Budget; and then when the GST comes into force, it can revise the estimates mid-way.

However, a more conventional way would be to make tax collection estimates based on last year’s growth or average growth of the past three years, and, of course, revise the estimates later.

For 2016/17, last year’s Budget estimated a total tax collection and indirect tax growth of 11 per cent. In the previous year though, the indirect tax collection grew at almost 30 per cent.

According to an economist, who did not wish to be quoted, the total tax collection in 2016/ 17 could be above `12 lakh crore, compared to the estimated `10.5 lakh crore (net of devolution to the states and refunds). This growth would factor in the buoyancy due to IDS (income disclosure scheme) 1, IDS 2, and the note ban. The total tax collected estimate including the states’ share was `13.77 lakh in 2016/17, compared to the revised estimate of `12 lakh crore in 2015/16.

Indirect tax collection, according to this economist, could grow by 12 per cent in 2017/18. “Our assumption is that the nominal GDP growth rate would be 11.2 per cent, so we expect indirect taxes to grow slightly higher than that,” the economist says.

However, Nidhi Goel, Managing Director, Tax and Regulatory Affairs, at audit and tax consultancy firm Protiviti Global, says that indirect tax collection in the previous year (2015/16) grew by more than 25 per cent, and a similar trend can be seen in the current financial year. She, therefore, believes that in the next financial year, irrespective of GST, indirect tax collection can grow at above 20 per cent.

Of course, the government and many economists are also hoping that with the roll-out of GST, the tax-payer base would increase, leading to higher indirect tax collection in the next financial year.

According to a Kotak Institutional Equities Research report, it would be difficult for smaller entities in manufacturing and services, known to under-report excise duties and service taxes currently, to stay out of the GST chain as the system of credits and debits under GST makes it incumbent on every entity in the GST chain to ensure payment of GST by the entities preceding them in the chain.

The report further notes that there is a lot of leakage of service tax revenues, given that the proportion of service tax (around 15 per cent) to overall tax revenues is quite small, especially in the context of the large share of the services sector in India’s GDP. Services account for over 50 per cent of India’s GDP.

In 2015/16, service tax collections grew by 25 per cent. In the nine-month period till December, in the current financial year, service tax collections have grown at 24 per cent.

With no GST to begin with in the next financial year, the Budget would have to make some indirect tax proposals, and almost all tax experts believe indirect tax proposals in the Budget would be aligned to GST.

The most expected indirect tax change in the Budget this year is an increase in the service tax rate from 15 per cent (inclusive of Swachh Bharat and Krishi Kalyan cess) to 18 per cent. This would be followed up by further reduction of the negative list of services. And if that happens, the taxes from services are slated to see a huge jump.

However, a few experts believe that assuming higher tax collection due to the increased user base post GST is far-fetched. Instead, they expect the jump in tax collection to happen over a period of three-four years. ~

REVENUE SHARING WITH STATES MAY NOT DIRECTLY IMPACT TAX COLLECTION ESTIMATES, BUT MAY IMPACT OTHER BUDGET ESTIMATES SUCH AS REVENUE AND FISCAL DEFICIT