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Stability Assessment Of Indian Economy After The Introduction Of GST Regime

The realistic and possible rates at which the new regime can be implemented is one of the most contentious questions in the talks around the goods and services tax. Several attempts have been made to estimate the size of the tax base and the revenue neutral rate that goes with it. The latest in the series is the report of the Task Force on GST of the Thirteenth Finance Commission. The majority of these exercises produce extremely low revenue neutral rates, raising concerns about the accuracy of these estimates and the related revenue risk.

Further, GST was a revolutionizing reform in the tax structure of the country, which came after long years of speculation and fears. It had several objectives such as to create a common market with uniform tax rate in India that is why the Slogan - One Nation, One Tax, One Market, and other objectives included: to eliminate the cascading effect of taxes, GST allows set-off of prior taxes for the same transactions as input tax credit and others, But A question that always crops up in the minds of citizens is that: whether GST has stabilised the Indian economy or destabilised it, with more repercussions.

This paper seeks to estimate the base for the proposed GST and validate the GST reforms with the objectives, it aimed to achieve.

Introduction
GST is the biggest reform for indirect taxes in India in the post-independence period. It simplified indirect taxation, reduced tax complexities, removed the cascading effect and led to one nation and one tax regime in India. Experts believe that GST will have a huge positive impact on business and change the way the economy functions.

A comprehensive multi-stage value-added tax (VAT) system, the Goods and Services Tax (GST), was introduced in India on 1 July 2017. The GST encompasses various indirect taxes from union and state tax bases. In a federal system, the harmonisation of tax rules, regulations, rates, processes and procedures across states is expected to improve the ease of doing business, encourage investment and produce economic growth.

But the success of any tax reform depends on successful implementation and the ease of tax compliance. Without GST system stability, it is difficult to comment on the success of its revenue mobilisation. It has been acknowledged that GST collection is falling short of the targets set in the Union Budget. The impact of revenue uncertainty is not restricted to union finances alone - it will spill over to state finances through tax devolution.

It is difficult to compare GST revenue collection with earlier systems of taxation. Given that the data available in budget documents and the Finance Accounts of state governments is disaggregated, it is not possible in pre-GST regimes to separate the revenue from sales tax, VAT, Central Sales Tax and entry tax into two separate baskets necessary for comparison.

These two baskets would include items which are subsumed under GST and out-of-GST items (which includes five petroleum products and alcoholic beverages for human consumption).
Revenue from Goods and Services Tax (GST) is not meeting budgetary targets for last two financial years and therefore it is important to understand the reasons behind shortfall in GST collection. Any shortfall in GST collection will not only impact fiscal management of the union government but also it will spill over to state finances in terms of lower tax devolution.

Structural changes made in the GST, in terms of increasing GST threshold and reducing tax rates for a large number of goods and services may have helped to moderate the impact of GST on Indian economy, but the revenue impact of the policy decisions cannot be negligible. In addition, revenue impacts of changes made in administrative provisions and procedures in GST require assessment for future policy directions.

Moreover, tax compliance under GST is not improving over time and therefore it is further delaying stabilization of GST. There are many challenges that tax administrations (both union and state tax authorities) are facing today in terms of complexities of GST Rules and Regulations and getting access to information for effective tax administration.

Given the revenue importance of GST in overall public finance management in India, in-depth understanding the reasons for revenue shortfall could help the government devise policies to overcome the challenges. The challenges before Indian GST can be classified into design and structural aspects of GST and tax administration and compliance related. In this paper we assess compliance and revenue performance of states in GST and estimate GST compliance gap.

A tax may be defined as a fee charged by a government on a product, income or an activity. It is a pecuniary burden laid upon individuals or property owners to support the Government, a payment exacted by legislative authority. A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority".

Taxes are broadly classified into direct and indirect taxes.
Direct Taxes:
If a tax is levied directly on or wealth an individual or an organization it is called direct tax. A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) on whom it is imposed. An incidence of direct tax cannot be shifted by the taxpayer to someone else. The burden of such tax is borne by the payer of tax himself. An important direct tax imposed in India is income tax.

Indirect Taxes:
If tax is levied on the price of a good or service, then it is indirect tax. The person paying the indirect tax passes on the incidence of tax to some other person. He collects the tax from his customer on sale of goods and services and remits it to the government. The ultimate burden of such tax falls on the final consumer of such goods and services.

If the taxpayer (such as a manufacturer or provider of service or seller of goods) is just a conduit and at every stage the tax incidence is passed on till it finally reaches the consumer, who really bears the brunt of it, such tax is indirect tax. An indirect tax is one that can be shifted by the taxpayer to someone else. Indirect taxes are also called consumption taxes, they are regressive in nature because they are not based on the principle of ability to pay. All the consumers, including the economically challenged bear the brunt of the indirect taxes equally.

Components of GST
There are three components of GST as follows:
  • Central Goods and Services Tax (CGST):
    Payable to the Central Government on supply of goods and services within the State/Union Territory.
     
  • State/Union Territory Goods and Services Tax (SGST/UTGST):
    Payable to the State/Union Territory Government on supply of goods and services within the State/Union Territory.
     
  • Integrated Goods and Services Tax (IGST):
    In case of inter-state supply of goods and services, IGST is levied by the Government of India. Equivalent IGST is also levied on imports into India. IGST shall be apportioned between the Union and the States as per the provisions of IGST Act.
     
  • GST Compensation Cess:
    In addition to GST, a cess named GST Compensation Cess can be levied on notified goods and services and currently such cess is levied on pan masala, tobacco, aerated drinks, cars and coal.
     

Key legislations
The Constitution (One Hundred and Twenty Second Amendment) Bill, 2016, for introduction of Goods and Services Tax in the country was passed by Rajya Sabha on 3 August 2016 and by Lok Sabha on 8 August 2016. Consequent upon this, the President of India accorded assent on 8 September 2016, and the same was notified as the Constitution (One Hundred and First Amendment) Act, 2016.

The following Acts were passed for implementation of GST with effect from 1 July 2017:

  • The CGST Act, 2017
  • The UTGST Act, 2017,
  • The IGST Act, 2017;
  • The GST (Compensation to States) Act, 2017


The above Acts were assented by the President of India on 12 April 2017 and enacted with effect from 1st July 2017. In addition to the above, each of the States have also passed the SGST Act. All the above Acts were further amended vide the CGST Amendment Act, 2018 and the GST (Compensation to States) Amendment Act, 2018, the IGST (Amendment) Act, 2018 and the UTGST (Amendment) Act, 2018 notified on 29 August 2018 and made effective from 1 February 2019.

Status Of Indian Economy With GST

Indian Goods and Services Tax (GST) regime has almost crossed the transition period (July 2017 to June 2022). So far performance assessment of GST covers only overall GST collection in India. There are various aspects of GST which are yet to be assessed with larger availability of GST data in the public domain.

Until recently, there was no state-level information on GST available in the public domain to undertake performance assessment. With better understanding on various components of GST collection and input tax credit (ITC) adjustment mechanism, especially with reference to Integrated GST (IGST), present paper attempts to undertake an in-depth performance assessment of GST both at the union and state level and estimate compliance gap of GST.

Performance assessment of states in compliance and GST collection is important for understanding on fiscal trajectory of state finances. State finance in India is undergoing many structural changes which would impact inter-government fiscal relations as well as fiscal autonomy of states. Tax base of states subsumed under GST used to contribute a significant share in Own Tax Revenue (OTR) mobilization and therefore revenue importance of GST in state finances is very high. Unlike the union government, states have limited taxation power to cope with any shortfall in GST collection.

Since continuation of GST compensation beyond the transition period is uncertain (Mukherjee 2020), it will be always important for states to protect their tax base and explore possibilities for additional revenue mobilization from existing sources of tax and non-tax revenues to meet ever increasing demands for public expenditures. Specific objective of this paper is to understand state-level compliance and collection in GST and estimate compliance gap.
  1.  Evolution of GST in India:
    France was the first country to implement GST in the year 1954. Within 62 years of its advent, about 160 countries across the world have adopted GST because this tax has the capacity to raise revenue in most transparent and natural manner.
    1. Kelkar Task Force 2004:
      The Finance Ministry of Government of India set up a Task Force under the chairmanship Mr.Vijay Kelkar in 2004 on the implementation of Fiscal Responsibility and Budget Management. It made recommendations to bring about a radical transformation of the Indian Tax System. It disagreed with the existing approach of the government to reduce government expenditure to achieve the fiscal consolidation.

      It has advised to go for a Revenue-led Approach which focuses on enhancing the revenues instead of compressing the expenditure. It went further to suggest that the Government should enhance capital expenditure in order to counterbalance the contraction effects of fiscal consolidation. The Goods and Service Tax is an outcome of the recommendations of the Task Force under the chairmanship of Mr. Vijay Kelkar. In India the draft of Goods and Service Tax (GST) was presented in the parliament in August, 2009.
       
    2. Initiative of NDA Government:
      Subsequently, the then Union Finance Minister, Shri P. Chidambaram announced that GST would be introduced from April 1, 2010. Since then, GST missed several deadlines and continued to be shrouded by the clouds of uncertainty. The talks of ushering in GST, however, gained momentum in the year 2014 when the NDA Government tabled the Constitution. (122nd Amendment) Bill, 2014 on GST in the Parliament on 19th December, 2014.

      The Lok Sabha passed the Bill on 6th May, 2015 and Rajya Sabha on 3rd August, 2016. Subsequent to ratification of the Bill by more than 50% of the States, Constitution.

      (122nd Amendment) Bill, 2014 received the assent of the President on 8th September, 2016 and became Constitution (101st Amendment) Act, 2016, which paved the way for introduction of GST in India. In the following year, on 27th March, 2017, the Central GST legislations - Central Goods and Services Tax Bill, 2017 integrates Goods and Service Tax Bill, 2017, Union Territory Goods and Services Tax Bill, 2017 and Goods and Services Tax (Compensation to States) Bill, 2017 were introduced in Lok Sabha. Lok Sabha passed these bills on 29th March, 2017 and with the receipt of the President's assent on 12th April, 2017, the Bills were enacted.
       
    3. State GST Laws:
      The enactment of the Central Acts was followed by the enactment of the State GST laws by various State Legislatures. Telangana, Rajasthan, Chhattisgarh, Punjab, Goa and Bihar were among the first ones to pass their respective State GST laws GST is a path breaking indirect tax reform which will create a common national market. GST has subsumed multiple indirect taxes like excise duty, service tax, VAT, CST, luxury tax, entertainment tax, entry tax, etc.
       
  2. New factors in GST
    Some of the notable factors introduced in GST, which were not there in the pre-GST era, have been detailed below:
    1. GST Council
      In terms of Article 279A (1) of the Constitution of India, as amended, the President of India constituted the GST Council with effect from 12 September 2016. The GST Council is a constitutional body for making recommendations to the Union and the State Governments on the issues related to GST. The GST Council, a joint forum of the Centre and the States, is chaired by the Union Finance Minister and members are the Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation or any other Minister nominated by each of the States.

      As per Article 279A (4), the Council will make recommendations to the Union and the States on:
      1. the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the GST;
      2. the goods and services that may be subjected to, or exempted from GST;
      3. the model GST Laws, principles of levy, apportionment of GST levied on inter-State trade supplies and the principles that govern the place of supply (POS);
      4. the threshold limit of turnover below which goods and services may be exempted from GST;
      5. the rates including floor rates with bands of GST;
      6. any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;
      7. special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
      8. Any other matter relating to the GST, as the Council may decide.
        While discharging the functions conferred by this article, the GST Council shall be guided by the need for a harmonised structure of goods and services and for the development of a harmonised national market for goods and services.
         
    2. Goods and Services Tax Network
      Goods and Services Tax Network (GSTN) was registered on 28 March 2013 under Section 8 of the Companies Act, 2013 as a Non-Government Company and a 'Not for Profit Organisation'. It was formed to provide common and shared Information Technology (IT) infrastructure and services to the Central and State Governments, taxpayers and other stakeholders for implementation of the GST.

      The Government of India holds 24.5 per cent equity in GSTN and all the States of the Indian Union, including NCT of Delhi and Puducherry and the Council, together hold another 24.5 per cent. The balance 51 per cent equity is with Non-Government financial institutions. It was decided (May 2018) to convert GSTN into a fully owned Government Company. Further action on this decision was yet to be taken by the Government. The objectives and organizational structure have been further detailed in Chapter III of this report.

     
  3. Cross empowerment and distribution of taxpayers
    Under GST, the taxpayers have to obtain separate registration in each State where they operate. A single challan is generated for paying all taxes of GST (viz. CGST, IGST, SGST and UTGST) under each registration and one single return is filed for both the central and state taxes. In view of this dual control, the GST Acts provide for cross empowerment of the Central and State tax officers to administer all the components of GST viz. CGST, SGST, UTGST and IGST.

    The tax officers carry out administration of all components of GST in respect of the taxpayers or specific areas allocated to them. While the State Commercial tax departments are responsible for administering functions assigned to the States, the Central Board of Indirect Taxes and Customs (CBIC) and its field formations carry out functions assigned to the Centre.

    As per circular of the GST Council dated 20 September 2017, the following criteria should be followed for the division of taxpayer base registered in a State between the Centre and the State to ensure single interface:
    1. Of the total number of taxpayers with turnover below 1.5 crore, all the administrative control over 90 per cent of the taxpayers shall vest with the State3 tax administration and 10 per cent with the Central tax administration;
    2. In respect of the taxpayers with turnover above 1.5 crore, all the administrative control shall be divided equally in the ratio of 50 per cent each for the Central and the State tax administration;
    3. The division of taxpayers in each State shall be done by computer at the State level based on stratified random sampling and could also take into account the geographical location and type of the taxpayers, as may be mutually agreed.

    The State tax officers have been empowered (October 2017) to grant refund of IGST and CGST and similar instructions on the State side were also issued empowering the Central tax officers to grant refund of SGST. The GST Council in its 9th meeting (16 January 2017) recommended that both the Central and State tax administrations shall have the power to take intelligence-based enforcement action in respect of the entire value chain and CBIC gave effect to this decision through a DO letter issued (October 2018) to its field formations.
     

  4. Concerns regarding GST
    • Lack of preparedness:
      The understanding of the provisions of GST is still at a nascent stage for many people engaged in business. They are still trying to assess the mandated GST compliance provisions that their relevant functional departments (such as IT Department, Legal department) need to adhere to.
       
    • Compliance related issues:
      Businesses need to file multiple returns which may increase manifold in accordance with business models. Clients will need to ensure timely compliance by registered suppliers to ensure there is no loss of input credit. This will necessitate correct data and reports to fill accurate GST returns.
       
    • Increased costs due to software purchase:
      Businesses have to either update their existing accounting or ERP software to a GST-compliant software or buy a GST software so that they can keep their business going. Both the options lead to increased cost of software purchase and training of employees for an efficient utilization of the new billing software.
       
    • Small businesses:
      Small and medium-sized enterprises (SMEs) who have not yet signed for GST have to quickly grasp the nuances of the GST tax regime. They will have to issue GST-complaint invoices, be compliant to digital record-keeping, and of course, file timely returns. This means that the GST-complaint invoice issued must have mandatory details such as GSTIN, place of supply, HSN codes, and others.
       
    • Lack of skilled resources and re-skilling existing workforce:
      As GST has been introduced recently, skilled staff with complete and updated subject knowledge of GST is not easily available. This has resulted in an urgent need for adequate skilled human resources well-versed with GST to ensure swift implementation. In addition, businesses will need to re-train their employees in GST compliance, further increasing their overhead expenses.
       
    • Multiple rate structure:
      The GST presently has a four slab structure with tax rates kept at 5%, 12%, 18% and 28%. The multiple tax structure has been justified on the ground that necessary items of mass consumption should be taxed at a lower rate while luxury items should be taxed at higher rates. However, multiple rates are likely to increase administrative complexity as well as create classification disputes. Such a system makes it difficult to evaluate the overall effects of the tax design.


India - Before & After GST Regime

The Goods and Services Tax's 14-year journey came to an end on July 1, 2017, with the introduction of what was billed as the country's biggest tax reform in 70 years of independence. While the central government was confident in its ability to establish the GST as a Good and Simple Tax, many others opposed it, seeing it as a half-baked GST regime imposed on taxpayers.

The implementation of the Goods and Service Tax (GST) has transformed the economy into a digital and standardised one, allowing for a seamless flow of information and the availability of a common set of data to both the Centre and the States, allowing for more efficient Direct and Indirect Tax collection. However, revenue statistics show that GST has failed to make an impact and has slowed India's economic growth. A comparison of pre- GST era and post-GST era will be used to verify the above statement.
  1. Gross Domestic Product Comparison: 2014-2020

    • 2013-14
      According to the data as recorded by central statistical organisation, the GDP Growth of India in 2013-14 was 4.74 at factor cost. The Services sector boomed with a growth of 6.78%. However, World Bank recorded the GDP Growth rate of India at 7.41.
       
    • 2015-16
      Real GDP or GDP at constant (2011-12) prices for the year 2015-16 is now estimated at `113.50 lakh crore (`113.51 lakh crore estimated earlier on 8th February, 2016), showing a growth rate of 7.6 percent (similar to 7.6 percent estimated earlier) over the First Revised Estimates of GDP for the year 2014-15 of ` 105.52 lakh crore, released on 29th January 2016.

      Real GVA, i.e., GVA at basic constant (2011-12) prices for the year 2015-16 is now estimated at `104.27 lakh crore (as against `104.38 lakh crore estimated earlier on 8th February, 2016), showing a growth rate of 7.2 percent (as against 7.3 percent estimated earlier over the First Revised Estimates of GVA for the year 2014-15 of `97.27 lakh crore, released on 29th January 2016.

      The sectors which registered growth rate of over 7.0 percent are 'financial, real estate and professional services' (10.3 percent), manufacturing (9.3 percent), 'trade, hotels, transport, communication and services related to broadcasting' (9.0 percent), and 'mining and quarrying' (7.4 percent). The growth in the 'agriculture, forestry and fishing', 'construction', 'electricity, gas, water supply & other utility services', 'public administration, defence and other services' is estimated to be 1.2 per cent, 3.9 per cent, 6.6 per cent and 6.6 per cent respectively.
       
    • 2017-18
      GDP at constant (2011-12) prices in Q2 of 2017-18 is estimated at `31.66 lakh crore, as against `29.79 lakh crore in Q2 of 2016-17, showing a growth rate of 6.3 percent. Quarterly GVA at Basic Price at constant (2011-12) prices for Q2 of 2017-18 is estimated at `29.18 lakh crore, as against `27.51 lakh crore in Q2 of 2016-17, showing a growth rate of 6.1 percent over the corresponding quarter of previous year.

      The economic activities which registered growth of over 6.0 percent in Q2 of 2017-18 over Q2 of 2016-17 are 'manufacturing', 'electricity, gas, water supply & other utility services and 'trade, hotels, transport & communication and services related to broadcasting'. The growth in the 'agriculture, forestry and fishing', 'mining and quarrying', 'construction' 'financial, insurance, real estate and professional services' and 'Public administration, defence & other services' is estimated to be 1.7 percent, 5.5 percent, 2.6 per cent, 5.7 percent and 6.0 percent respectively, during this period.
       
    • 2018-19
      GDP at constant (2011-12) prices in Q1 of 2018-19 is estimated at ` 33.74 lakh crore, as against ` 31.18 lakh crore in Q1 of 2017-18, showing a growth rate of 8.2 percent. Quarterly GVA at basic price at constant (2011-2012) prices for Q1 of 2018-19 is estimated at ` 31.63 lakh crore, as against ` 29.29 lakh crore in Q1 of 2017-18, showing a growth rate of 8.0 percent over the corresponding quarter of previous year.

    The economic activities which registered growth of over 7 percent in Q1 of 2018-19 over Q1 of 2017-18 are 'manufacturing, 'electricity, gas, water supply & other utility services' 'construction' and 'public administration, defence and other services'. The growth in the 'agriculture, forestry and fishing', 'mining and quarrying', 'Trade, hotels, transport, communication and services related to broadcasting' and financial, real estate and professional services is estimated to be 5.3 percent, 0.1 percent, 6.7 percent, and 6.5 percent respectively during this period.
     

  2. GDP Data Assessment

    There is now only one tax rate for all, resulting in a unified market in terms of tax application and frictionless goods and service transactions among states. The transaction will be less expensive as a result of this. According to a report, road transport enterprises are subject to ten to eleven different forms of taxes. As a result, the GST will assist in lowering transportation costs by removing other taxes.

    Because there will be no cascading effect of taxes on goods and services after the implementation of GST, exports of goods and services will become more competitive. According to a study conducted by NCAER, GST will be the most significant change in the Indian economy, increasing GDP by 1.0 to 3.0%. GST is more transparent in comparison to the previous law provision so it will generate more revenue to the Government and will be more effective in reducing corruption at the same time. Overall GST will improve the tax Compliances.

    According to a research released by the Finance Ministry, the GST structure will benefit the Make in India initiative more due to the availability of input tax credit on capital goods. Because the GST will subsume all other taxes, the excise duty exemption given to manufacturers will be eliminated, resulting in an increase in government income and possibly an increase in GDP.

    The GST regime has a significant impact on a variety of factors, including GDP. The Gross Domestic Product (GDP) has a tendency to shadow over the revenue earned by the economy over the course of a year. Still, a worthwhile point includes that the GST has the capability to extend the GDP by a total of 2 percent in order to complete the ultimate goal of increasing the per-capita income of every individual.

    Furthermore, the GST scheme will undoubtedly improve the government's indirect income by enhancing and enforcing tax compliance, hence expanding the tax-paying base and increasing revenue. The government's additional revenue will be directed toward development projects and urban funding, resulting in an overall suggested situation.
     
  3. Negative Impact

    In a report, DBS bank noted that initially, GST will lead to the rise in inflation rate which will remain for a year but after that GST will affect positively on the economy. As we know Real Estate also plays an important role in Indian economy but some expert thinks that GST will impact the Real Estate business negatively as it will add up the additional 8 to 10 percent to the cost and reduce the demand about 12 percent.

    GST is applied in the form of IGST, CGST AND SGST on the Centre and State Government, but some economists say that there is nothing new in the form of GST although these are the new names of Central Excise, VAT, CST and Service Tax etc. As every coin has two faces in the same way we tried here to familiarize the things related to GST with both perspective i.e. positively and negatively in this article. Despite having some factor which is being expected to affect the Economy adversely there are so many other things which are expected with a positive impact on GDP.
     
  4. Overall Revenue Performance Of GST

    Gross Value Added (GVA) (at basic prices, current prices, 2011-12 series) for Q4 of 2019-20 is estimated residually by subtracting sum of GVA during Q1 to Q3 of 2019-20 from the 2nd Advance Estimate of GVA for 2019-20, which is brought out by National Accounts Division of the Central Statistical Office (CSO) on 28 February 2020.

    We have also estimated total GST collection (comprising of SGST, CGST, IGST and GST Compensation Cess) for 2019- 20 by applying annual average of average quarterly GST collection (as % of GVA) of 2017-18 (i.e., 6.99%) and 2018-19 (i.e., 6.93%) on 2nd advance estimate of GVA for 2019-20. GST collection for Q4 of 2019-20 is estimated residually by subtracting sum of GST collection during Q1 to Q3 of 2019-20 (i.e., Rs. 905,313 Crore) from the estimated full year's GST collection of 2019-20 (i.e., Rs. 1,286,853 Crore). GST collection during Q4 of 2019-20 is estimated to be Rs. 381,540 Crore.

In the month of January 2020, Rs. 105,366 Crore of GST collection is reported. Therefore, the balance GST collection during Q4 of 2019-20 is estimated to be Rs. 276,174 Crore. Bunching of GST collection (or GST payment) is observed during Q4 of last two financial years (2017-18 and 2018-19). It is also expected that similar bunching will be experienced during Q4 of 2019-20. Since tax buoyancy of GST collection is volatile, we avoided projection of GST collection based on tax buoyancy.

GST revenue shortfall may arise due to problems associated with the design and structure of GST, policies and practices of GST administration and tax compliance. The multiple rate structure may have helped to moderate GST incidence across different segments of society but it is prone to classification disputes and tax evasion. Frequent reductions in GST rates may have improved tax compliance, but the revenue implications cannot be ignored. Frequent changes in the compliance requirements, processes and procedures may also delay stabilisation of the GST system.

There are several GST provisions which have not yet been adopted in practice. In the 32nd GST Council Meeting a decision was made to extend the annual turnover limit for GST registration under the composition scheme from Rs 10 million (US$140,000) to Rs 15 million (US$210,000) and to allow annual return submission. The tax rate for manufacturers under the composition scheme has been reduced from 2 per cent to 1 per cent.

The annual turnover limit for the composition scheme for services or mixed suppliers was extended to Rs 5 million (US$72,000) with a composition rate of 6 per cent. The GST threshold limit was extended from Rs 2 million (US$29,000) to Rs 4 million (US$57,000).

The revenue implications of these decisions are not notional or negligible - GST revenue collection is expected to bear the burden of these policy decisions. This will impact the Union's finances through higher compensation payment obligations in cases where states' GST collection falls below a 14 per cent annual growth rate (the rate of net revenue collected by the state from taxes subsumed under GST in the base year 201516).

On-time filing of returns is desirable to achieve stability in the tax compliance regime. The introduction of any new system of filing returns may impose additional costs for tax compliance such as procuring new software and training personnel to comply with a new system. This will further delay stabilisation of the GST return submission system.

Tax evasion could be contributing to a shortfall in GST revenue collection. Claiming input tax credit against fake invoices is the most common method of tax evasion. Under-invoicing is the result of collusive tax evasion mechanisms - sellers and purchasers mutually agree to under-report the value of transactions. To combat tax evasion, e-way bills were introduced in April 2018 to capture information on the movements of goods. But effective enforcement of the e-way bill system demands intensive monitoring, so revenue leakage cannot be ruled out.

Advantages Of GST

The key features of the proposed GST provide a very interesting and useful first reference for any discussion of GST in India.

The key features can be summarised as follows:

  • Dual GST:
    A central and state GST to apply on the same base. Each tax would operate on the principles of input tax credit, where tax credit for each tax would be self-contained. No cross-credit would be allowed except in the case of interstate transactions. - For interstate transactions, the discussion paper proposes a regime called IGST, wherein the exporter charges IGST in place of the GST in such transactions, claims input tax credit for any taxes paid, and remits the balance to the central government. The exporting state remits any local taxes that are claimed as credit by the exporter to the central government/central administrator. In the importing state, the importing dealer is allowed to claim tax credit for the IGST paid from the central government. The claims across states will be cleared by a central clearing house kind of mechanism. It is proposed to cover both b-b and b-c transactions.
     
  • Multiple Statutes:
    One for the centre and one each for the states. To the extent feasible, uniform procedure for collection of both CGST and SGST would be prescribed in the respective legislation: while separate returns are mandated for the two taxes, it is proposed to aim for a common format.
     
  • Tax administration by respective tax departments:
    Timely refund where credit accumulation takes place to be avoided by design where feasible. Pan-linked taxpayer identification number, to allow for easy sharing of information across the different tax administrations, including income tax.


Way Forward For India
We adopt the estimates provided in the CEA Report for 2013-14 in the absence of any updated estimates of revenue under consideration from GST and respective shares of the Centre and States in total GST collection. We employ a basic revenue projection method based on the annual GDP growth rate. In this case, we assume that tax stability is unitary and stable throughout time.

Therefore, monthly revenue from GST is expected to be Rs. 109,616 Crore during 2017-18. Gap in monthly GST collection will vary between Rs. 19,616 Crore to Rs. 29,616 crore if monthly revenue collection varies from Rs. 90,000 Crore to Rs. 80,000 Crore. This shows that there is considerable shortfall in GST revenue collection and it demands an in-depth analysis to identify reasons for such shortfall.

Conclusion
Indirect tax growth dropped to 5.80 percent in 2017-18, compared to 21.33 percent the previous year. The Centre's revenue on goods and services (except Central Excise on Petroleum and Tobacco) fell 10% in 2017-18 compared to revenue from subsumed taxes in 2016-17 after the adoption of GST. The Government of India used the Finance Commission formula to devolve the IGST year-end balance to the States, which is in violation of the Constitution of India and the IGST Act. This also has the effect of distributing funds to the States on a completely different basis from the IGST Act's "Place of Supply" idea.

During 2017-18, there was a brief transfer of'6,466 crore of GST Compensation Cess to the Public Account.

While it was expected that compliance would improve as the system stabilised, from April to December 2018, all returns filed (GSTR-1, 3B, 4, 5A, and 6) showed a downward trend in filing. The filing percentage of GSTR-1 returns were throughout less in comparison to the corresponding filing of GSTR-3B returns.

The implementation of GSTR-3B led to the filing of returns with unsourced ITC claims, and also appears to have discouraged the filing of even GSTR-1. Because GSTR-1 filing is required, short-filing is a source of concern that must be addressed. Due to the fact that GSTR-3B is merely a summary return, short-filing of GSTR-1 meant that tax departments did not receive entire invoice level details as filed by suppliers, which could be used to validate GSTR-3B details or calculate turnover.

Bibliography
Articles:

  • Mukherjee, S. (2020), "Possible Impact of Withdrawal of GST Compensation Post GST Compensation Period on Indian State Finances", NIPFP Working Paper No. 291. New Delhi: National Institute of Public Finance and Policy (NIPFP), January 2020.
  • Mukherjee, S. (2019a), "Issues of Compliance in GST - Reflecting on the CAG's Report", Economic and Political Weekly, 54(47): 22-24.
  • Mukherjee, S. (2019b), "Whether States have Capacity to Sustain Projected Growth in GST Collection during the Compensation Period?", NIPFP Working Paper No. 275. New Delhi: National Institute of Public Finance and Policy (NIPFP), July 2019.
  • Mukherjee, S. (2019c), "Value Added Tax Efficiency across Indian States: Panel Stochastic Frontier Analysis", Economic and Political Weekly, 54(22):40-50, 2019.
  • Mukherjee, S. and R. Kavita Rao (2019), "Fiscal Implications of Introduction of Goods and Services Tax in India", Report Submitted to the Fifteenth Finance Commission, National Institute of Public Finance and Policy (NIPFP), New Delhi.
  • Mukherjee, S. and R. Kavita Rao (2017), "Estimating Unaccounted Income in India: Using Transport as a Universal Input", Economic and Political Weekly, 52(7):107-115.
  • Nerudova, D. and M. Dobranschi (2019), "Alternative method to measure the VAT gap in the EU: Stochastic tax frontier model approach. PLOS ONE, 14(1): e0211317. https://doi.org/10.1371/journal.pone.0211317.


Statutes:

  1. Central Goods and Services Tax Act, 2017.
  2. State Goods and Services Tax Act, 2017
  3. Integrated Goods and Services Tax (Extension to Jammu and Kashmir Act, 2017)
  4. Goods and Services Tax (Compensation to States) Act, 2017


Written By: Riya Jain

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