Two Years Of GST: How States Are Benefiting More Than The Centre
Average monthly GST receipts of states went up by 27% in FY19 while for the centre it declined by 2.74%.
After long delays, the Goods and Services Tax was launched in India at the midnight of June 30 - July 1, 2017. It is the biggest indirect tax reform in the country. In the current form, GST has subsumed eight central and nine state taxes. The GST introduced on July 1, 2017, has since undergone many changes, both with respect to its operations and tax rate. All decisions are taken at the GST Council, with the Union Finance Minister as the chairperson, with the Union Minister of State for Finance and state finance ministers as the other members. Since its formation, the GST Council has had 35 meetings, as of June 21, 2019.
GST Collection Trends
The regime is slowly settling in and the GST Council is working on plugging the leakages in tax collection. Let’s look at how GST collections have moved in the 22 months after its implementation. Mind you, since these are still early times, any 'year-on-year' growth comparison is unlikely to provide great insight.
Total GST collections in the eight months of FY18 were Rs 7.17 lakh crore and increased to Rs 11.79 lakh crore in the in full fiscal of FY19. On a monthly average basis, GST collections grew 9.6 percent. One can look at a broad trend of GST collections in the 22-month period. GST collection in the very first month of its introduction was Rs 93,960 crore, but declined gradually to Rs 83,780 crore in November 2017 and picked up thereafter, though not in a linear fashion.
In the 22 months, GST collections have crossed the Rs 1-lakh crore mark six times: April 2018, October 2018, January 2019, March 2019, April 2019 and May 2019.
Higher collections in April 2018 and April 2019 could be attributed to year-end payments, but three consecutive months of collections over Rs 1 lakh crore during March-May 2019 raise hopes of collections showing sustained buoyancy.
A noteworthy point about GST collections in FY19 was that the tax revenue collections in each month of FY19 were higher than any month in FY18 barring August and September 2017. Even if one looks at a smoothened collection run-rate on a trailing three months average basis, it shows a gradually increasing trend from January 2019. Introduction of the e-way bill is one of the major reasons for the gradual improvement in GST collections.
The number of GST returns (GSTR 3B) filed are also increasing gradually and peaked in February 2019 (up to March 31, 2019) at 76 lakh after declining to 72 lakh in April and May 2018. This could be due to the bunching up of returns filed towards the end of the fiscal year. The GST Council's 31st meeting, on December 22, 2018, gave relief on the last date of filing returns, registration and refund procedure. These steps are likely to improve compliance. In the GST Council meeting held on June 21, 2019, the deadline for filing of annual GST returns and audit forms was extended to August 31, 2019.
Are GST Collections In Line With Government Estimates?
The union budgets for 2018-19 and 2019-20 suggest that GST collections have fallen short of targets. For FY19, the government budgeted Rs 7.44 lakh crore of GST collections in the gross tax revenue of union government, which was revised to Rs 6.44 lakh crore. Actual GST collections in FY19 were Rs 5.8 lakh crore, as per the estimates of the Controller General of Accounts.
State Governments Benefiting From GST
The data provided by the CGA provides a breakup of GST accruals to the union government by CGST, IGST and compensation cess. A comparison of the GST data from CGA and the collections in the month of August 2017 suggests that the sharing of revenue with states in August 2017 was negligible. It started in September 2017. Till April 2019, the government has shared IGST with states five times.
A higher share in IGST is one of the major reasons for the higher proportion of states’ share of GST in FY19. While the CGA provides IGST data on a net basis (IGST collections net-of-settlement with states for that particular month), the unavailability of data on the intra-state distribution of GST and settlement hampers a granular analysis of the impact on each state. Although the state budgets should have provided clarity on this, however, the classification and treatment of GST in state budgets hamper any meaningful analysis.
Excluding August 2017, the average monthly GST receipts of state governments in FY18 were Rs 39,030 crore, which rose 27.05 percent to Rs 49,589 crore in FY19. For the union government, it went down by 2.74 percent from Rs 50,033 crore to Rs 48,664 crore.
Clearly, the sharing of IGST has benefitted states more than the centre.
Implications On Budget Numbers
After subsuming most indirect taxes, GST is an important source of revenue for the union government. Fiscal consolidation, to a large extent, hinges on the government’s ability to plug the leakages in the GST. In FY18, the proportion of GST-to-gross-tax-revenue was 23.06 percent, the second highest after corporation tax, and 61 basis points higher than income tax.
In FY19, as per CGA data, while GST was still the second-largest component after corporation tax, the difference between GST and income tax widened to 577 basis points.
Despite the GDP growth in Q4FY19 declining to 5.8 percent from 6.6 percent in Q3FY19, the growth of aggregate GST collections (centre + state) in Q4FY19 rose to 14.32 percent, from 12.10 percent in Q3FY19. This suggests that there is still scope for GST collections to grow. While higher GDP growth will no doubt provide a boost to GST collections, improving efficiency can also boost GST revenue growth.
This has an important bearing on the FY20 budget, to be presented on July 5. As per the interim budget, GST collections were revised downward to Rs 6.4 lakh crore in the revised estimate for FY19, from the budget estimate of Rs 7.4 lakh crore in FY19. The actual collections were even lower, at Rs 5.8 lakh crore. The difference between the FY19 revised estimate and preliminary estimates for gross tax revenue, as per CGA, was Rs 1.7 lakh crore. 37.1 percent of this shortfall was due to the GST collection shortfall. As per the interim budget, the union government has budgeted Rs 7.6 lakh crore as the FY20 GST revenue. To achieve this, FY20 GST collections have to grow at 30.9 percent over FY19, an uphill task. However, the government can bridge the shortfall by improving the efficiency of GST collections.
Devendra Kumar Pant is Chief Economist and Senior Director, Public Finance at India Ratings & Research. Views are personal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.