The Goods and Services Tax was an unprecedented step in changing the way India’s fiscal system works. Introduced on July 1, 2017, the tax replaced a slew of indirect taxes at the state and Union level, merging them into one mechanism. Since then, however, the Goods and Services Tax has belied the fanfare with which it was introduced. Tax collection under this system has consistently fallen short of targets.
As per the Union Budget for 2018-’19, the annual target was Rs 13,48,000 crore. This works out to a monthly target of Rs 1,12,000 crore. But this target has not been met for a single month in the past nine months of the current financial year. As a result, as per a report by Kotak Institutional Equities, the annual Goods and Services Tax shortfall in 2018-’19 could go up to Rs 1 trillion or Rs 1,00,000 crore.
This significant shortfall has put the revenues of the Union government under pressure. As per a report in the Business Standard, this will mean the Centre’s fiscal deficit – or the gap between expenditure and revenue – will possibly breach its target of 3.3%, hitting 3.5% of the gross domestic product in 2018-’19. This crunch could explain the politics behind the Union government’s demand for a special dividend from the Reserve Bank of India.
Even more troubling for the Union government is that the Central Goods and Services Tax is falling short of the State Goods and Services Tax even though they should, in theory, be the same.
The shortfall was explained by the Centre in November 2017 as a result of “balance credit available with them [tax payers] in the previous tax regime”. However, it is unclear why this gap still existed in December 2018.
In June, Finance Secretary Hasmukh Adhia wrote to the Central Board of Indirect Taxes and Customs to conduct a performance review of Union government tax officers as a result of the shortfall in Goods and Services Tax revenue collection of these officers as compared to their state counterparts. Adhia wrote that the “performance of central government officers is worse than the state government except in a couple of states”.
Goods and Services Tax jurisdiction is shared amongst the Centre and states such that the states get 90% of taxpayers with annual turnover below Rs 1.5 crore and the Centre gets the rest. Taxpayers with a turnover above Rs 1.5 crore are divided 50:50 between the Centre and the states.
As per the terms of the Goods and Services Tax, states have to see their revenue rise by 14% year-on-year based on their 2015-’16 revenue. Any deficit in this figure has to be made up by the Centre. As a result, the Union government transfers Goods and Services Tax compensation to the states every two months. In this, the financial year 2018-’19 started off well with a compensation of only Rs 3,899 crore. However, that number shot up by nearly four times for the next two months.
However, matters in 2018-’19 are marginally better from the point of view of states as compared to 2017-’18. While the average Goods and Services Tax shortfall for the states was 16% in the 2017-’18 financial year, this number came down to 13% during the April-August period in 2018-’19.