Here's how govt can still meet fiscal deficit target despite GST shortfall

Crossing Rs 1 trillion, the goods and services tax (GST) collected in October brought cheer to the government. But a closer look at this financial year reveals that the trillion mark was touched only twice in seven months. As a result, analysts expect a shortfall of Rs 500 billion in Central GST (CGST) in FY19. 

Despite this imminent shortfall, the government looks confident of achieving the fiscal deficit target of 3.3 per cent of the gross domestic product (GDP). Does it mean that acche din (good days) have really arrived for GST or the government will have to look for other sources of revenue or squeezing expenditure? 

With the 2019-20 interim budget less than three months away, things look far from good due to the enormity of task at the taxman’s hand. The average monthly revenue from GST in the remaining five months of 2018-19 needs to be at least 14 per cent more than that the average of last seven months, a feat observers say is virtually impossible. 

Government officials and experts say it is highly likely that the October spurt is due to the increased consumption in the festive season, and has less to do with increased compliance. 

The overall GST collection in 2018-19 is expected to be Rs 12.3 trillion, or Rs 1.03 trillion per month. In the seven months till now (April-October), the average monthly revenue from GST stands at Rs 970 billion, six per cent short of the target. 

To match the expectation, the government needs at least Rs 1.11 trillion a month — a feat unachieved — for the next five months, 14 per cent more than the last seven months’ average. 
Adjusting for refunds, analysts from Kotak research put the monthly requirement a few notches higher to Rs 1.24 trillion per month. 

However, changes to acts pertaining to Integrated GST (IGST) and compensation cess carried out in August 2018 are likely to give a breather — in the form of extra revenue — to the Centre. 

While finalisation of the ad hoc settlement of IGST is likely to give more revenue to the Centre, the unutilised compensation cess will be available to the Centre and states in the financial year itself. 

The IGST collected is distributed among the Centre and states in two ways: regular settlement, in which the share of both is determined by identifying the place of supply, and ad hoc settlement, under which some amount in the IGST kitty is distributed equally between them, when needed. 

While the former is an accurate apportionment, the latter is provisional, or remains “for the time being”, as the amendment puts it. Under regular settlement, the Centre has got about 53 per cent, while the states have got 47 per cent, if we consider the last three months’ data. 

However, under the latter, the states enjoy a bigger share “for the time being” since both get 50-50. Thus, it is likely that at the time of Budget 2019 when the final settlement would be done, the Centre’s share in the IGST would be more than expected. 

According to preliminary calculations, that would give the Centre Rs 70-80 billion more than the budgeted estimate of Rs 500 billion. 

On the cess front, the amount from the collected cess that remains unutilised after compensating for revenue shortfall of states was to be kept untouched in a public account till 2022, according to the original law. This was amended to allow the government to use the unused amount in the financial year itself. 

The Centre has budgeted to collect Rs 900 billion as compensation cess, and the actual collection is fairly on track. Extrapolating current data, experts and officials put the unutilised amount estimates at Rs 200 billion at the end of the year, which would help the Centre with another Rs 100 billion (half will go to states). 

In addition, GST compliance is better now than in earlier months. The number of returns filed has grown steadily from 6.05 million in April to 6.75 million in October. More importantly, the average GST collected per monthly return filed has improved from the low of Rs 140,000 in August to Rs 150,000 per return in October. It had gradually decelerated from roughly Rs 171,000 in April. 

This is significant since this rise came despite the reduction in GST rates for various goods and services at the end of July. This rate cut initially had a negative impact on collection of IGST on imports, which declined from Rs 265 billion in July to Rs 253 billion in September. But it has now jumped to its peak of Rs 269 billion in October, suggesting increased compliance and consumption. 

Official data from the GST Network (GSTN) accessed by Business Standard shows that daily e-way bill generation has increased from 1.56 million per day in June to 1.73 million per day in October and the first week of November. 

This rise has come in line with the corporate performance in the second quarter of 2018-19, which ended in September — a proxy for the health of the economy. Half of the leading sectors have shown the best growth in net sales since the inception of GST. Sales of a sample of 783 companies grew 21.5 per cent in Q2 2018-19, as against 8 per cent in Q2 2017-18, a report by Care Ratings said. 

However, anti-evasion measures might not be instrumental in shoring up revenue. “What you catch is always a small fraction of what is going on,” a tax official said. Though some news reports show that two thirds of detected evasion has been recovered in the April-September period, the amount recovered — at Rs 23 billion in six months — is too minuscule compared to Rs 5.8 trillion collected in this period. 

In addition, the effect of festive season would wean off soon, and election mode would creep in at the time of the budget. The challenge before the government now is to use the factors that are favourable to its benefit. 

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel