Indian two thousand rupee banknotes are arranged for a photograph in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Why Further GST Rate Cuts, Structural Changes May Not Happen Any Time Soon

An expected slash in GST rates for goods such as cement, refrigerators and air conditioners may now be on hold, said PwC’s Partner and Leader Pratik Jain, as revenue collection for February fell versus the previous two months’ collections.

“We were expecting that a lot of the items which are under 28 percent [slab] right now will also be brought down to 18 percent...I don't think that will happen any time soon because the government wants to stabilise collection,” Jain said in an interview with BloombergQuint. “Even structural changes such as petroleum products coming under GST. Those kind of decision, the government will not be willing to take right now.”

The government may have underestimated the revenue impact of lower Goods and Services Tax rates, he said as collections from India’s new sales tax show a downward trend.

“When the rate cuts happened in mid-November, the impact that the government said on our fiscal would be Rs 20,000 crore,” Jain said. “Maybe they want to review that because really, the collections are going down.” The government reduced the GST slab for a number of goods to 18 percent from 28 percent in November.

February collections from India’s new reformative sales tax fell to Rs 85,174 crore as on March 26, the Finance Ministry said in a statement. That compares with Rs 86,318 crore collected in January and Rs 88,929 crore in December. The February number stands marginally improved, at Rs 93,691 crore, if regularised for a 30 day month.

Jain says that’s still lower than the projected Rs 1.1 lakh crore per month that the government hopes to collect in fiscal year 2018-19.

Some experts expect the state-wise roll out in April of the e-way bill mechanism to boost revenue. The government will now look forward to the implementation of e-way bill mechanism to boost revenue, Abhishek Jain, partner-indirect tax at EY India told BloombergQuint earlier.

PwC, however, does not think that introduction of e-way bills will have a significant impact on collections. “Many states have had such systems before and I haven’t seen any empirical evidence to support that e-way bills will make a difference,” he said.

The GST data is not as bad as it looks indicates a report authored by Neelkanth Mishra, India economist and strategist at Credit Suisse.

“The headline number of Rs 852 billion (Rs 85,174 crore) appears a bit disappointing, but given 10 percent fewer days, the run-rate is an improvement. We expect this improvement to continue as the year progresses, given healthy nominal revenue growth in key sectors.”

Key takeaways from Mishra’s note -

  • February 2018 GST collections took the FY18 total to Rs 4.6 lakh crore, 3.3 percent higher than the Rs 4.44 lakh crore in the revised FY18 budget.
  • Central GST collection was below target and unallocated Integrated GST much above. This may persist in FY19 too.
  • January 2018 GST collection first reported at Rs 86,300 crore, is now at Rs 88,900 crore continuing the trend of the final collection for a month being higher than first reported.
  • The number of entities reporting within the deadline has continued to rise and filings for February 2018 were marginally higher than the numbers that eventually filed for July 2017.

Regarding filings, the government data released on Tuesday suggests there were more filings in February than in the previous month. About 59.51 lakh GSTR-3B returns were filed as on March 26 versus 57.78 lakh GSTR-3B returns filed in January (as on Feb. 25). But almost nine months into implementation of this new tax the compliance rate stands at of just 69 percent.

Total Registrations: 1.05 crore
Composition Dealers: 18.17 lakh
Expected to file: 86.83 lakh
Actual filings: 59.51 lakh

Watch the full conversation here.

Do you think e-way bills will help fill the gap?

The government believes so. I am not sure. I haven’t seen any empirical data. I don’t think e-way bill will make a huge difference. Many states had this kind of systems earlier also and I haven’t had empirical evidence to say that those states have done better that other states. But let’s keep our fingers cross. Government believe that the difference between Rs 1,12,000 crores odd and Rs 86,000 crore that they are collecting on an average will be largely met up by e-way bill.

When the rate cut happened in mid-November, the impact the government said on fiscal would be around Rs 20,000 crore a year because of a rate cut. Maybe they want to review that because really, the collections are going down. In first three months, July-September, you were around Rs 92,000-93,000 crore on an average and now you are around Rs 85,000-86,000. So, if the difference is largely attributed to the rate cuts then that Rs 20,000 crore estimate has to be looked at.

There are cases where there is large scale of invasion happening. The smaller dealers or competition dealers, recently few people were arrested because they were running fake invoice racket. As the data gets richer, which is available with government, they can do sophisticated data analytics to see which are the pockets where evasion is happening more. All this things with e-way bill included should see new push in coming months. For March, it should be more than Rs 1 lakh crore.

Are you suggesting an increase in rates? That will make you the single-most unpopular person in this country.

I am not suggesting rate increase. But I am suggesting that the estimate of Rs 20,000 crores because of the rate cut needs a review. We were expecting that lot many items which are in 28 percent right now, will also be brought down to 18 percent which include cement, paint, cameras, refrigerators, air conditioners, etc. I don’t think it will happen any time now because the government want to stabilize the collection.

Also, some of the structural changes like petroleum products coming under GST. That kind of decisions government will not be willing to take right now. Unless the revenue collection stabilizes, they would not want to do any structural changes. In that sense, it is not that only collections coming down, but it will hamper the further improvement on GST that we were all expecting.