Solution to shore up revenues does not lie in depriving GST of its progressive character
By G Gokul Kishore
The GST Council is scheduled to meet on December 18 with the agenda to arrest falling collections. The shortfall in revenues is impacting compensation to the states, and the unrest is palpable. The debate has changed from inflated and bogus input tax credit claims and non-filing of returns to addressing inefficiencies in the rate structure. Suggestions in public domain include increase in the lowest slab of 5% to 6%, and levy of compensation cess on some of the goods attracting 18% rate. Cess is presently confined to items that fall in the 28% category. To avoid a major disruption, converging 12% and 18% rate into 15% or 16% rate is not on the agenda. However, shifting some items from 12% slab to 18% rate is being discussed. An increase in the rate for sin goods is also doing the rounds.
Tax revenues cannot be divorced from the state of economy and dip in consumption. In the pre-GST regime, taxable event was manufacture for levy of excise duty, sale for applicability of VAT and provision of services for payment of service tax. But in GST, supply of goods or services is a taxable event. Therefore, mere production does not attract any levy and does not contribute to revenue for the exchequer unless the goods are supplied. In the intermediate stages, input tax credit neutralises tax revenue accruing to the government. Cause and effect of subdued consumption, thus, should be taken into account when the finance ministers meet for the GST council.
Lower collections from compensation cess is attributed to the slowdown in the auto sector—a major segment attracting cess. To reduce dependence on one or two sectors, the council should give serious thought to levy cess on certain non-essential items under 18% slab.
Beauty and cosmetic preparations, marble and articles of plastics can attract additional cess. The tax incidence on most of these goods in the pre-GST regime was around 27%. Pruning of items resulted in several goods coming under 18% rate without eminent rationale. Hence, revisiting the items covered under 18% slab is sine qua non at this juncture.
E-way bill system has been implemented successfully. This should have had restraining influence on supply of goods without invoice. Recently introduced restriction of limiting input tax credit to the extent of 20% where invoice details have not been reported by suppliers in their outward supply return is a welcome step. Proposed e-invoicing for large taxpayers from next year will give further impetus to such measures. Although these are intended to plug revenue leakage, they are not capable of significantly altering revenues.
Evasion is perceived as alarmingly high and is cited as a major cause for depressed collections. Revenue projections as contained in Budget documents take into account loss on account of tax incentives, but do not account for loss due to frauds. Non-implementation of invoice matching for input tax credit is a major lacuna. For decades, manufacturers were availing Cenvat credit without any matching of invoices. Pre-GST period also had a fair share of evasions, but were not the focus of discussions of tax shortfall.
The rate of growth in VAT collections during the period before implementation (2001-02 to 2004-05) was around 10%. This figure rose to 15% to 20% from 2008-09 onwards—three years after nation-wide roll-out of VAT. New tax law needs some time for all the stake-holders to reorient themselves. A grand reform of the magnitude of GST cannot be judged by tax collections during the initial years. Frequent changes in rates and returns have been made more out of necessity. But, stability and certainty have suffered in this process. The council is required to do the fine balancing act of providing stability even while being responsive and adaptable.
Stagnant industry also means pile up of inventory of raw materials. Quantum of tax credit lying unutilised will be more, resulting in lesser or no cash payment for taxes on output supplies. This effectively dents the net tax revenues of the government. In the pre-GST regime, refund of accumulated input tax credit due to inverted tax structure was not available. GST law has specific provision for refund in such cases. Except goods or services used in construction of immovable property and a small negative list, GST law allows tax credit on everything used for business. Such factors put together do affect tax collections. The solution to shore up revenues does not lie in amending such liberal provisions depriving GST of its progressive character.
Increase in limits for threshold exemption and composition scheme may not have had substantial impact on revenues, but the base has shrunk to some extent. Lack of clarity on composite supplies, intra-company support services, post-sale discounts, liquidated damages, anti-profiteering provisions coupled with issues like restriction on input tax credit for sectors like real estate and hotels and attempt to cover BPOs and ITES sector under intermediary service compel taxpayers to adopt aggressive position. Issues affecting several sectors need to be addressed before the taxpayers are convinced of the interpretation adopted by the tax administration. Revenue gets blocked in such grey areas only to be further choked in long-winding litigation.
Advocate, Lakshmikumaran & Sridharan. Views are personal