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Goods and Services Tax (GST) collections may likely witness a slow or even negative growth rate for at least six months from March due to the impact on Covid-19 on manufacture, business and consumption. An analysis of different scenarios reveal that GST revenue for the past 30 months has been uneven, volatile, indolent and far below official targets, point out KJ Joseph, N Ramalingam and L Anitha Kumary, faculty at the Gulati Institute of Finance and Taxation (GIFT), a think-tank in Thiruvananthapuram.
They said in a co-authored paper titled ‘GST Revenue of India and Kerala: Lessons from 30 months; Data and Suggestions to the 15th Finance Commission’ that the state of Kerala, known for its high consumption and heavily dependent upon other states for goods and services, expected more revenue from GST. But the experience from July 2017 till date has been less than assuring.
Negative growth in Kerala
For the state, 19 out of the 30 months saw negative trends while the upward growth in the rest 11 reveals high volatility, due largely to receipt of ad hoc settlements. The inconsistent collection of revenue, coupled with the uneven IGST remittances and ad hoc amounts, have forced it to constantly depend on Ways and Means sources of funds for meeting monthly, regular and committed expenditure.
The Centre has to compensate the states based on the year-on-year standard growth rate (14 per cent) fixed as per Sections 3 & 4 of the GST (Compensation to States) Act, 2017. The percentage share of CGST and SGST has been increasing whereas the percentage shares of IGST and compensation are decreasing. The decreasing share of compensation cess on the total revenue may not mean adequate balance amount in the cess account, the paper says.
Insufficient balance
Average release of compensation to states per month has increased from ₹4,571.78 crore during 2017-18 to ₹15,062.25 crore during 2019-20. The balance available in the cess account (₹5,774 crore) is sufficient to pay only one-third of a month’s obligation to the states. This will become even lesser in January-March 2020 and for the next couple of years due to the impact of Covid-19.
Decline, both in SGST and IGST, coincided mainly with the two-time revision in GST rates of the high elastic goods from 28 per cent to 18 per cent, the paper notes. In order to maintain the targeted 14 per cent growth rate, the combined reduction in SGST and IGST components is sought to be filled by compensation that rose from 14.7 per cent in 2017-18 (nine months) to 40.7 per cent in 2019-20 (10 month). This means that Kerala may end up demanding even more compensation in the coming months.
Streamline tax governance
The authors put forth a series of recommendations to the 15th Finance Commission, including (i) streamlining tax governance and compliance procedure that demands minimum effort to submit return and remit tax, (ii) apportionment of IGST revenue to the states on a monthly or by-monthly basis, (iii) a review of exemptions, concessions and tax benefits to minimise tax distortion and revenue leakage, (iv) a separate ‘State GST revenue gap grant’ for funding states to implement welfare schemes, and (v) amendment of the GST Compensation to States Act 2017 by extending the compensation deadline from 2022 to 2027 or beyond due to Covid-19 impact.
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