The implementation of the Goods and Services Tax is likely to be showcased as one of the biggest achievements of the current NDA government in the upcoming general elections. To give the Centre its due, shifting all the States to the new indirect tax regime, where they lose control over the levying of a bulk of the indirect taxes, was no mean task.

The bureaucratic machinery also rose to the challenge, working round the clock, to migrate the mammoth indirect taxpayer base to the new system. After complaining loudly in the first few months, consumers too have largely accepted the new taxes; some deft adjustment of rates by the GST Council helped.

But that does not mean all is well with the new system. In a bid to ease the transition process, the GST Council has rolled back many of the anti-tax evasion provisions that were built in to the GST structure. The initial zeal shown by businesses in collecting GST appears to be slackening and tax evasion is ubiquitous in our everyday dealings, especially in B2C transactions, in smaller retail outlets. Lower return filing numbers also indicate that the new system could be resulting in higher revenue leakage.

It’s therefore not surprising that monthly GST collections have been faltering. Numbers show that the shortfall in GST collections so far in FY19 may be more than ₹1 lakh crore. This could have an adverse effect on the fiscal deficit, unless collections in the next few months move higher to bridge this gap.

Collections falter

At surface-level, monthly GST collection numbers put out by the Centre appear healthy. Between April and November 2018, monthly revenue averaged ₹95,358 crore, above the average of ₹89,885 crore in FY18. Collections crossed the ₹1,00,000 crore mark in April and October 2018, with the highest collection in April 2018 at ₹1,03,459 crore.

But, are these collections sufficient? If we consider the estimated GST collections in the Union Budget of 2018-19, the collections so far appear to be falling well short.

According to the Union Budget, monthly collections from CGST, IGST and compensation cess ought to add up to approximately ₹62,000 crore. If the estimated SGST collection, after accounting for 14 per cent annual increase is added, we get a targeted monthly GST collection of approximately ₹1,11,000 crore for FY19.

Going by these Budget estimates, GST collections between April to November 2018 ought to have been ₹8,88,000 crore. The actual collections, according to the Ministry of Finance, has been ₹7,76,317 crore; resulting in a shortfall of ₹1,11,683 crore in the first eight months of this fiscal.

If we consider the GST revenue of the Centre aloneas put out by the CGA, excluding the SGST and portion of IGST allocated to States, monthly collections averaged around ₹47,000 crore between April and October 2018, against the budgeted requirement of around ₹62,000 crore every month. These numbers too show a deficit of around ₹1.05 lakh crore

Why the shortfall?

This deficit is contrary to initial expectations that the tax base will widen considerably post-GST as more entities from the unorganised sector migrate to the new system, resulting in higher revenue for the Centre and the States.

One part of the objective has been achieved — the tax base has certainly widened; kudos to the indirect tax department for making this happen. While 66 lakh entities were migrated from the old system, around 58 lakh new taxpayers have registered on the GSTN; taking the total registrations of regular GST payers to 1.24 crore.

Besides these, 17.7 lakh taxpayers are registered to pay lower rate of GST under the compensation scheme. It’s therefore clear that taxpayers are aware of the need to on-board.

The problem, however, lies in the number of people filing returns. Of the 1.24 crore registered taxpayers, only 75 lakh are filing GSTR 3B returns; these are summary returns based on self-assessment of input tax credit and tax liability. In other words, only 70 per cent of the registered taxpayers are filing the summary returns. The compliance for filing GSTR 1 returns (that require invoices details of outward supply to be uploaded along with the returns) is even lower at 53 per cent.

Even if it is assumed that many taxpayers may not have any transactions to report and some might be below the GST threshold, the compliance rate is still of concern.

Anti-tax evasion measures

A major reason behind this lower compliance is the dilution of the anti-tax evasion measures in-built into the GST system. Invoice-matching, wherein the invoice details uploaded by the vendor were to be auto-populated in the taxpayers’ returns to enable claim of input tax credit, has not taken off at all due to technical issues in the GSTN and inability of taxpayers to adapt to the complicated process. Invoice matching would have plugged leakage of GST revenue.

As of now, tax is being paid based on the taxpayers’ assessment of his tax liability and input tax credit. While outward invoices are being uploaded later with GSTR 1 return, GSTR 2 return, where the input tax credit could be ascertained based on the vendors’ invoices, has been done away with.

Therefore, it is doubtful if all the input tax credit currently being claimed are authentic; that is whether the vendor has paid the tax due from him, to the tax authority.

It is possible that some vendors of larger companies were forced to take GST registration, so that the larger companies could claim input tax credit, but the smaller companies are not really paying tax. The gap between GSTR 3B and GSTR 1 forms also needs to be examined; while 75 lakh GSTR 3B returns are being filed every month, number of GSTR 1 returns are only 66 lakh.

Way forward

The single simplified return proposed by the GST council in its July meeting could help mitigate many of these issues. But it needs to be implemented fast, despite political pressure to postpone it; until after the elections.

The proposed return would have two tables, one for outward supplies and the other for claiming input tax credit based on invoices uploaded by the supplier. Invoices can be uploaded on a continuous basis and can be selected by the buyers to lock his credit. In other words, input tax credit can be claimed only on tax declared and paid by the vendor.

The next stage of GST rollout, improving tax collections needs to start at the earliest by addressing the technical challenges at the GSTN and beginning a fresh phase of educating the taxpayers and helping them refurbish their systems to move on to the new returns.

Bringing back the reverse-charge mechanism to expand the tax-net further and effective supervision of e-way bill usage are other means through which GST collections can be improved.

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