As the government readies to present another budget, the big question is how to improve tax collections. Direct taxes collections have been going up but it is the indirect tax collections in India that have faltered. That is because the GST rates were cut sharply in the month of October and that itself was supposed to cause a loss of Rs.20,000 crore. Additionally, the government also shifted from monthly filing to a friendlier quarterly filing for smaller businesses. All these factors combined have created a difficult environment for GST. As is well know, the major heads of indirect taxes now are customs duties and GST as excise duties, service tax, sales tax and VAT have all been subsumed into GST. Here are four effective tax collection strategies that the government needs to work on to improve the indirect tax collections..
Increase output and GDP growth
One of the key reasons for the fall in indirect tax collections is the weak GDP growth. For the third quarter ended December, the full year advance estimate of GDP has come in at just about 5.7%. That means the full year GDP for fiscal year 2017-18 may end up around 6.3-6.5%. A one percentage point fall in GDP creates a huge stress on indirect tax collections. The idea is to reintroduce tax incentives for capital investments so that production can pick up. India has been receiving record FDI of over $60 billion each year and this needs to be leveraged to create a plethora of downstream and upstream sectors which can add to output and incomes. Lastly, the SME sector is the big missing link in the Indian growth story. The SME sector has literally borne the brunt of demonetization and GST and that has had its impact on export performance too. SMEs are also major job creators and hence impact purchasing power in a much bigger way. This budget must focus on SMEs in a big way with incentives, tax breaks and a revival package. That will automatically lead to an increase in indirect tax collections.
Greater government spending
Like in the previous years, the current year is also going to see the government spending aggressively to revive the economy. The decision to adopt a countercyclical approach to fiscal deficit is a good decision as the prime focus now is to expand the manufacturing sector output. We are already seeing Greenshoots in sectors like cement and steel and more government spending on infrastructure and the agricultural sector is likely to see a lot of industrial sectors benefiting from this trend. Normally, government spending on infrastructure and agriculture has a multiplier effect on indirect tax collections. That is something the government needs to sustain despite calls to the contrary.
Appropriate amnesty scheme
There have been a number of amnesty schemes on the direct taxes front but none really on the indirect taxes front. This budget should actually use the opportunity to come out with an amnesty scheme for indirect taxes. There are billions of dollars of money that is stuck in disputed cases of excise duty, service tax and sales tax. The best way out for the government will be to offer a one-time amnesty scheme to facilitate a smooth transition into the GST mode. This will excite a lot of people as most GST refunds that are stuck are due to past issues pertaining to service tax and excise duty. Apart from a one-time amnesty scheme, the government should also seriously consider a special scheme where tax assessees will be permitted to use the plea bargain facility in case of penalties. Here taxpayers are permitted to pay a penalty and get on with business without admitting or denying the allegations. These measures can help smoothen the entire process of GST collections and also help unlock crores of unpaid dues.
Look at import duties as a form of protection
The government has been offering selective protection in certain sectors through customs duties, import quotas etc. The government should look to sit with the industry bodies and list the product categories where higher import duties can be imposed. Of course, this can be limited to products where the threat of dumping is higher, especially the popular cases like radial tyres, electronic goods and steel where China has been dumping cheaper products into India. The government can also consider a temporary cess or surcharge as a revenue bridging measure.
The government needs to seriously look at improving its indirect tax collections. The positive spill-offs of GST will take some time to translate into a bigger base and expand the GST ambit. Till then the government has to pay the price of the vagaries of GST collections. This budget needs to seriously look at ways and means of expanding indirect tax revenues.