Context
In theory, the shift to GST made eminent sense, yet in practice, some of these expectations have been belied.
Why have GST collections not measured up to expectations?
- This could be due to a combination of three factors:
- First: The tax rates under GST are lower than in the earlier regime-GST was not revenue neutral, to begin with.
- Second: There has been massive tax evasion due to under-reporting, input credit scams and fake invoices
- Third: A slowing economy has impacted firm revenues, and thus tax collections.
GST should have been revenue-neutral but it is not
- Fitment exercises not carried out: The fitment exercise should have been undertaken in a manner so as to ensure that collections pre and post GST are the same.
- But, this fundamental principle was not adhered to, and other considerations dominated.
- Revenue neutrality Vs. Multiple objectives: The GST council began its deliberations not with the single objective of revenue neutrality, but with multiple objectives in mind.
- Closeness to existing tax: Council wanted to ensure that rates were close to the existing tax incidence (accounting for cascading); to ensure minimal impact on inflation.
- Not regressive: The council also wanted the proposed rate structure was not regressive in nature.
- The council wanted that items of mass consumption were not taxed at a higher rate.
- Achieving all these objectives simultaneously proved a difficult task.
The issue of tax evasion
- It is difficult to arrive at firm estimates of the scale of the problem but there are some indications of its size.
- In West Bengal, it was estimated that the value of goods (July 2017 to March 2018) entering a state appeared to be under-reported by around Rs 50,000 crore.
- Rs 60,000 crore in Madhya Pradesh, and Rs 1,50,000 crore in Maharashtra.
- Numerous cases of tax fraud and fake invoice scams have also been detected since then
Problems involve and possible solutions
- Invoice matching: It is argued that invoice matching will help if implemented it from the beginning.
- It could have helped plug the loopholes.
- Issue of under-reporting: It is debatable whether invoice matching can end under-reporting (collusion) and fake invoices.
- Limit of state capacity in handling cases: The Central and state administrations can intervene in only about 3 lakh cases in a year.
- Their capacity to track lakhs of transactions on a daily basis is questionable.
- Slowing economy: Already existing structural issues have been compounded by the slowing economy.
Way forward
- There are certain options available to the government.
- First: Either recalibrate the expectation or carry on the efforts to plug the loopholes and the shortcoming in the system.
- Second: Lower the cut-off for composition scheme. A higher level simply encourages business “splitting”.
- Third: Reduce exemptions.
- Fourth: The council must deliberate on the rate structure, bringing it in line with pre-GST levels.
