Galvanizing Simple Transparent Tax

GST was introduced in Bharat on 1st July, 2017 as a tax reform measure for unification of all indirect taxes across the country. The items that are kept outside the purview of GST are- alcohol for human consumption, petroleum products and electricity – where the states have the freedom to levy the taxes. Under the GST laws, the states have been assured of an annual 14% rise over the base year 2015-16 for five year period starting from 2017-18 up to 2021-22 when the GST was introduced.

During the year 2017-18, total revenue collections under GST in the period between July 2017 and March 2018 have been Rs. 7.41-lakh crore. The average monthly collection under GST in the eight months till March 2018 amounted to Rs 89,885 crore. 

Total compensation released to the states for eight months during 2017-18 was Rs. 41,147 crore to ensure that the revenue of the states is protected at the level of annual growth of 14 per cent over the base year tax collection in 2015-16 as per the statutory commitment given by the centre under the GST laws. 

Goods and Services Tax (GST) collections touched Rs. 11.77 lakh crore in the 2018-19 fiscal. The monthly average of GST revenue during 2018-19 is Rs. 98,114 crore, 9.2 per cent higher than the previous fiscal (i.e., 2017-18). For the year 2018-19 centre released compensation of Rs. 69,275 to the states towards the shortfall in the assured minimum GST revenue annual growth of 14% over the base year of 2015-16. 

The central Government originally estimated its central GST revenues during 2019-20 as Rs. 7.6 lakh crores that has been subsequently revised to Rs. 6.13 lakh crores whereas the actual collections during the year have been at Rs. 5.92 lakh crores. The actual gross GST collection (domestic and import) during 2019-20 has been at Rs. 12,22,129 Crores registering a marginal growth of 4% over 2018-19. The GST compensation released by the centre to the states for the year 2019-20 was Rs. 1,65,302 Crs. 

The GST compensation cess collection made by the centre in 2017-18, 2018-19 and 2019-20 was Rs. 62,611 Crs, Rs. 95,081 Crs and Rs. 95,000 Crs respectively. As against this total GST compensation cess collection of Rs. 2,52,692 Crs the centre has paid a total GST compensation of Rs. 2,75,724 to the states during the same period. 

Goods and Services Tax collections for the April 20 to June 20 quarter stood at Rs. 1.86 lakh crore, a 41% drop in comparison to the Rs. 3.14 lakh crore collected in the same period last year.

Post Covid, the centre has recently estimated that the GST shortfall to the states during the year 2020-21 at Rs.3 lakh crores. The estimated loss to the states on account of transition to GST alone is Rs. 97,000 Crs and the decline in GST revenues due to the impact of Covid is at around Rs. 2,00,000 Crs.

The centre expects the GST compensation cess collections during the year 2020-21 at Rs. 65,000 Crs. Since it is not possible to fully compensate the states for the estimated GST shortfall of Rs. 3 lakh crores even after dipping into the cess fund, the centre sought the opinion of the Attorney General of India on paying the states for the shortfall in GST from the consolidated fund of India who advised the centre not to do so.

Hence, the centre has proposed to the states two options-

1. Either borrow Rs. 97,000 crore (the estimated loss on account of a transition to GST but without taking into account the Covid-19 pandemic) or

2. Borrow the entire shortfall of Rs. 2.35 lakh crore (i.e., after factoring the estimated GST compensation cess collection of Rs. 65,000 Crs in the overall GST shortfall estimated at Rs. 3 lakh Crs).

The modalities are being worked out for the above two options. However, the states have expressed their resentment on this and have requested the government to bail them out from this situation. 

There is also a criticism that the centre frequently resorts to levying cess and surcharges that are outside the divisible pool which have increasingly become important instruments of revenue mobilisation. This criticism is supported by the factual data.

Revenue mobilisation by the central government through cess and surcharge stood at Rs. 3 lakh crore or 15.7 % of Centre’s gross tax revenue in 2017-18 which went up to Rs. 5.12 lakh crore in 2019-20 (BE) accounting for 21.03% of the Centre’s gross revenue.

Citing this, several states are requesting the centre to compensate them for the GST revenue shortfall from the funds mobilized by the centre from cess and surcharge instead of asking them (states) to borrow for the shortfall in GST. 

GST Revenue Projections are faulty?

Bharat’s GDP growth in 2015-16 was 8.2% and it was 7.1%, 7.2%, 6.1%, and 4.2% for the years 2016-17, 2017-18, 2018-19 and 2019-20 respectively. This data clearly indicates that the country’s GDP growth rate has been on the decline even though there is a growth annually. In the last quarter of the year 2019-20 i.e., January-March 2020, the GDP growth declined further to 3.1% which is the lowest growth rate in the last 44 quarters.   

One main reason for the shortfall in the GST revenues of the states as against the constitutional guarantee given by the centre of 14% annual growth with the base year of 2015-16 apparently appears to be over estimation of the GDP growth for the period 2017-18 to 2021-22 and the GST revenues to be accrued to the states thereof. 

Tax capacity: In 2018-19, the tax revenue of state governments and central government together stood at around 17.5% of GDP. The 15th Finance Commission in its interim report noted that tax revenue is far below the estimated tax capacity of the country and it has mostly remained unchanged since the early 1990s.

In contrast, tax revenue has been rising in other emerging markets. The Commission recommended: (i) broadening the tax base, (ii) streamlining tax rates, and (iii) increasing capacity and expertise of tax administration in all tiers of the government.

The 15th Finance Commission is also expected to deal with the mechanism of centre’s bearing the burden of shortfall in GST revenues of the states beyond 2021-2022 since as per the current GST Laws the states have been assured of an annual 14% rise over the base year 2015-16 for five year period starting from 2017-18 when the GST was introduced whereas the 15th Finance Commission recommendations for revenue sharing covers the period 2020-21 to 2024-25.

Way forward

It would be wise for the centre to adhere to its constitutional obligation of compensating the states for the GST revenue shortfall in the assured annual growth of 14% up to the period 2021-22. It would equally be prudent on the part of both the centre and the states to share the shortfall in the GST revenues that is beyond the assured annual growth of 14% after arriving at a consensus in GST council.

Both the centre and the states have to focus on broad basing the GST by simplifying the tax slabs and compliances. Similarly, increasing capacity and expertise of tax administration in all tiers of the government as recommended by the 15th Finance Commission in its interim report is equally important. 

Let us hope the centre and the states will work in this direction, enhance the tax collections primarily by improving the efficiency of tax administration, cut down the wasteful government expenditure and increase the tax revenue which is currently very low at 17.5% of GDP.


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About the Author

Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]