Falling GST Revenues - Getting to the bottom of it - Motilal Oswal

Falling GST Revenues - Getting to the bottom of it..

The GST revenues in the five months since its launch in July 2017 have been showing a downward trend. In fact, in the month of October the collections fell by nearly 10% on a month-on-month basis. What is the reason for this sharp fall in GST revenues and why is GST revenue collection in India faltering? To understand the story of falling GST revenues India, here are the key points you need to understand..

Delays in GST registrations..
According to the Finance Ministry, one of the reasons for the slow GST collections is the technical hitches in GST registrations. Many accounts in service tax and excise have not been automatically ported into the new GST system. That has created delays in GST payments. Smaller businesses who were filing monthly returns have now shifted to the quarterly filing of returns which is skewing the monthly figures. The quarterly numbers should be more representative of the actual GST collections. The bottom-line is that the government needs to work with the technological backbone developed by Infosys to ensure that the technical issues are sorted out expeditiously.

Cut in GST rates..
In fact, the singular reason for the sharp fall in GST revenues in October was the cut in GST rates on a plethora of products that were placed in the 28% bracket. The revenue loss was estimated to be in the range of RS.20,000 crore and that put a huge pressure on collections. The purpose of the cut in GST was that the lower prices will spur in demand and the GST revenues will compensate in volumes what it loses in value. While that is a logical line of thinking, the benefits will be manifest only in the second year onwards.

Need to improve on tax compliance..
The GST was conceived as a foolproof mechanism of plugging revenue leakages. However, certain important pieces of the GST puzzle had to postpone due to practical reasons. For example, the e-way bill which will offer seamless tracking of goods will largely plug evasion of GST. But that will be only launched later this year. Similarly, the reverse charge mechanism may have been extreme simple for small businesses to ensure compliance but that has also been postponed. Once these measures are reintroduced later this year, the actual GST collections numbers should improve.

The issue of claiming IGST credit..
This has been another reason for the tepid collections under GST. In the first 3 months there was an additional flow of Integrated GST (IGST) due to the first time requirement of paying IGST on inter-state transfer of goods even within the same company. The subsequent months saw a reduction in SGST as credit against the payment of SGST was claimed. Therefore the collections in the months of October and November may be more reflective net of credit.

At the end of the day, GST is supposed to be revenue neutral. In the GST Council meeting of 18th January, rates on a number of goods and services have been further cut. This could also have an impact on GST collections in the coming months. The crux of the matter is that GST is likely to be revenue neutral on an overall basis.

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