SEPTEMBER 16, 2019

By Dr G Gokul Kishore

GST is a mega economic reform. Taxes are subsumed in economics and tax reforms are economic reforms when they are deep and expansive. While the government has been emphasising that all is not gloom and doom, there is no denying the fact that economy has slowed down. Some argue that the slowdown is not structural but cyclical, but we are not high priests of economics to comment on the same. There is also a view that demonetisation and GST are the two key factors to push the economy into bearish phase. Let us analyse, in this 55th part, whether GST can be made to stand the trial for the economic woes of the country.

GST revenues are dependent on industrial performance

Taxes like GST are not collected like fee for use of any facility provided by the government. Taxes are imposed on business and industry and they cover almost all economic and professional activities. Therefore, it does not require an Adam Smith to say that when the industry is not performing well, tax collections will lag. GST, by design, is comprehensive as it has assimilated almost all the taxes on goods and services prevalent before its introduction. GST, by legislation, is a single tax for the entire nation with dual structure. More the comprehensiveness of tax system, more will be the impact of industrial performance on the same. Depressed GST revenues are nothing but a logical consequence of economic downturn. For industrial sluggishness, generally poor consumption is blamed and for the latter, several reasons like disposable income, postponement of purchase decisions and credit availability are attributed. Since GST follows business activity, it cannot be in the league of the reasons mentioned above. This is not to say that taxes do not affect industrial growth but it can hardly be a dominant or sole factor.

Industry is used here to refer both secondary and tertiary sectors - manufacturing and services. Services generally ride piggy back on manufacturing. It is a different story that agriculture has been a long-neglected sector except that when industry suffers, rural households are blamed for not increasing their consumption so that manufacturing industry thrives. Consumption is demand-driven and not necessarily influenced by supply always. Right from introduction, GST revenues have not surpassed the target. When economy was doing well but GST revenues did not keep pace, tax compliance was cited as poor and evasion was perceived as widespread with many in business being portrayed as trying to bypass or hoodwink the system. Now when both are not doing well, the narrative has changed.

GST revenues - Dip attributable to obvious reasons

Several rounds of rate reduction since introduction of GST will naturally dent the collections. Some of the reductions covered huge number of goods and the cut was rather steep like from the rate of 28% to 18%. A full ten percentage reduction for large number of commodities cannot guarantee increased tax revenues unless demand for such goods increases tremendously in a very short span of time and this is obviously impossible. Despite the restrictions of availment of input tax credit on goods and services covered under Section 17(5) of CGST Act, it remains a fact that credit facility stands extended to very many items and services in GST regime as compared to earlier tax dispensation. The threshold for registration has been kept very low as well. If everyone in the chain is entitled to lot of credits, the net revenue that accrues to the exchequer cannot be a windfall. Increased ITC is the USP of GST system and we are not advocating roll back of credit facility. But, one should be prepared for the natural fallout of such liberalized credit scheme as well.

In Central Excise, there was no provision to obtain refund of accumulated ITC arising due to inverted tax structure. However, in GST, except for a small negative list, refund of ITC in such scenario is available and the industry does claim this benefit. Compared to filing of rebate claim in excise era, automatic credit of IGST refunds after exports has resulted in increased refunds. Delay in crediting or sanctioning refunds is not highlighted here as the same affects working capital position but does not paralyse the industry as flashed in the media almost daily these days. If GST is an industry-friendly tax regime with more credits and more refunds, then neither revenues can witness quantum jump in just two years nor can it be blamed for slowdown of the industry and economy.

Tax evasion - Is it the only reason for lower revenues?

Tax evasion is as old as tax itself. But one can see evasion of payment of GST being cited as a key reason for lower revenues. Today, all of a sudden, a few circular trading transactions for availing fraudulent ITC and arrest of key personnel are cited as proof of spike in tax evasion. In excise era, certain sectors like tobacco and iron & steel were traditionally considered as evasion prone and even today this tag continues. Prosecution of key personnel in certain cases of evasion used to be less publicised affair sans any media glare.

If almost every transaction is getting reported online, Scotland Yard is not required to decipher the data, the pattern and the missing links in the chain. More effective tools to detect evasion are available today thanks to electronic system of tax administration. While evasion is due to unreported transaction escaping the tax net, by active information exchange between the income tax and GST wings of revenue department, unearthing the same becomes easier. Matching income tax returns and Form 26AS with service tax or excise or GST returns and comparing accounting statements can be undertaken since tax returns are now technology driven with all such forms and returns available with the department in electronic format. These advancements should enable the tax administration to not only detect evasion more efficiently but also ensure such persons and transactions are brought on board resulting in revenue. However, tax revenue projections and targets are not set based on potential leakage of revenue through evasion. If evasion is not quantifiable with precision because of its unreported nature, it can hardly be held as one of the key conspirators of lower tax revenues. Probably, in a well-performing economy, leakages are affordable but when there is a downturn, they pinch more and hence, evasion is being seen as on the rise, spoiling the dream run of GST.

Allow time for GST to settle down

GST is a progressive reform with one tax system governed by harmonious laws and ensuring free movement of goods across the nation. If the measure is so big, it needs time to settle down - for the tax administration to change its mind set, for the businesses to report every transaction and for the dispute resolution bodies to provide purposive interpretation to advance the objectives. It may be a painful phase in evolution. The GST Council and the tax administration should adopt a long-term vision plan with time-bound action for addressing the pain points. Restoring the credit chain for realty and hotel industry, keeping the rate regime stable, enabling an ecosystem to facilitate honest taxpayers and the like will make GST bring smile on the face of the industry.

[…To be continued]

See - Part 54

[The author is an Advocate. Views expressed are strictly personal.]