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Union Budget 2018 and the Goods and Services Tax (GST)

05 Jan 2023

The Union Budget 2018 is likely to be the first Union Budget after the GST was implemented in July 2017. The GST has gone through a major churn in the last 6 months since its implementation. Most of the provisions of the GST were tweaked to make them more user-friendly. Also the rates have been brought down consistently and the sharp fall in GST collections post September is largely due to the sharp cut across over 200 products in the 28% tax category. While rates remain to be tweaked, most of the rate changes will happen as part of the GST Council meetings and are unlikely to be taken up as part of the budget. How exactly will the budget 2018 influence the GST?

                                    Source: Ministry of Finance

Falling GST revenues is a worry for the government..
As the chart above indicates, the GST collections have been trending down and the fall has been very sharp post September. While this is largely attributed to the sharp cut in GST rates, the shifting of many small businesses to the quarterly filing mode has also made a big difference to the GST collections. At the current strike rate, the total collections under GST could be lower than the collections that used to happen under the indirect tax heading. That is not a comfortable scenario at a time when the government fiscal deficit has overshot its target and it needs huge outlays for infrastructure and removing farm distress. The budget will look to plug leakages in GST revenues with more stringent collection targets and better use of technology.

Incentivise coverage under GST and timely payment of GST taxes..
Apart from being a national tax, GST also had another major purpose and that was to expand the tax base. In fact, the big challenge for GST was not about cutting down the procedural flak but it was about expanding the GST paying base. Most of the small and medium sized enterprises managed to escape the tax net under the old system. The GST was supposed to be a more transparent and robust system which will actually encourage even the neighbourhood jeweller and grocer to register under GST and start paying his taxes. Of course, this is a two way street and takes time but the government will look to incentivise the timely registration and payment of GST through more concessions, tax rebates, set-off benefits etc. Once the GST mass is increased substantially due to these incentives, the real argument of GST that simpler structure will improve compliance, will start to manifest itself. We could see progress on this front too in this budget.

Address the plethora of rates prevalent in the GST system..
The primary focus of the GST was to simplify taxation to the extent possible. For example in excise duties you had a large number of slabs and then there were excise rebates and there were different methods of excise calculation like specific and ad valorem. To keep GST simple it was essential to keep the rates at a bare minimum. But over the last few months we have seen a plethora of rates emerge like 28%, 18%, 12%, 5% and 0%. In addition, there is gold that attracts special GST rate of 3%. Then there are additional levies and the complication continues. In the process, the GST system defeats the very purpose by becoming as complicated as the old system that existed. The focus of this budget will be on reducing the number of slabs, have a conceptual classification of products and services  rather than a product based classification and gradually move the number of slabs down.

Use the Budget to address the woes of the export community..
We also see the Union Budget move aggressively in creating liquidity for exporters. Currently, nearly $10 billion of export refunds are held up with the GST department, which has constrained liquidity for exporters. There are technological issues and issues of compatibility with old cases. All these have combined to create a literal logjam for exporters who are finding their working capital locked up. This budget is likely to address how to finance exporters against refund receivables or ways and means to either monetize the same or expedite the clearance of these refunds. Expect this budget to focus largely on this one issue.
This could be the one big focus area for the government with respect to GST in the Union Budget 2018. The threat is visible as the export growth is faltering and the trade deficit in December has gone up to $15 billion. At a time when the fiscal deficit is likely to slip by 40-50 basis points, the government will not be able to afford a spike in trade deficit too. A combination of higher fiscal deficit and higher trade deficit could have negative implications for the value of the INR as also for India’s external ratings. That is best avoided and this budget is likely to address this point!

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