Collections from GST have thus far been heartening. Between August 2017 and March 2018, Rs 7.19 lakh crore were collected under the GST at an average of Rs 89,885 crore per month, which included Rs.1.19 lakh crore of Central GST (CGST), Rs 1.72 lakh crore of State GST (SGST), Rs 3.66 lakh crore of IGST (including Rs 1.73 lakh crore on imports) and Rs. 62,021 crore of compensation cess (including Rs 5702 crore on imports). Compensation cess is levied on luxury goods for raising the funds to compensate the states for any possible loss of revenue. Compensation is required to be paid to the states to protect their revenues from taxes subsumed in the GST at the level of 14 per cent growth over the collections of 2015-16. While GST on domestic supplies pertaining to a month is collected and accounted for in the next month, IGST and cess on imports are collected in the same month. Including the collection IGST and cess of July 2017, the total GST collection during the eight months of the financial year 2017-18 since its launch stood provisionally at Rs 7.41 lakh crore.
The SGST collection during these eight months, including the settlement of IGST, amounted to Rs 2.91 lakh crore and the total compensation released to the states for this period was Rs 41,147 crore, leaving Rs 20000 crore of compensation cess still undistributed. The revenue gap of each State ~ the shortfall of collections under GST from the expected growth ~ has been declining every month and the average revenue gap of all states stood at 17 per cent at the end of March 2018. The number of returns filed by taxpayers, which is an indicator of compliance, has increased from Rs 59 lakh in July 2017 to about Rs 65 lakh in March 2018, but it is still far short of over one crore taxpayers registered with the GSTN (64 lakh indirect taxpayers who migrated to GST and 38 lakh new registrants). This remains a problem and point towards the possibility of tax evasion. Around 18 lakh of these taxpayers are registered under the composition scheme for small traders that comes with a flat tax liability and low compliance, and can serve as a conduit for evasion.
The total GST collections stood at Rs 94610 crore in May, 2018, and soared to Rs 95610 crore in June, which included CGST of about Rs 16000 crore, SGST Rs 22000 crore and IGST Rs 49500 crore, the rest being on account of compensation cess. Taxes paid during March, reflected in April, shows a spike due to the normal fiscal year-end effect, but even discounting this, the IGST collections show an increasing trend while CGST and SGST figures remain more or less stable. While it indicates that inter-state trade is increasingly passing via the GST portal, it also creates a serious problem because much of the IGST so collected remain unallocated.
IGST is not a new tax but any collections under IGST need to be allocated between CGST and SGST depending on the matching of details submitted by the buyer and the supplier of goods and services located in different states. If details cannot be matched, the amount remains unallocated. Thus in June, of the total IGST collections of Rs 49498 crore, Rs 15968 crore were allocated to CGST and Rs 14662 crore to SGST leaving Rs 19159 crore as unallocated balance. The unallocated IGST balance has been accumulating over the past 12 months and has reached Rs 1.81 lakh crore by now. The IGST Act does not envisage what needs to be done in such a situation. But the Centre had decided to devolve Rs 50,000 crore to the states in June, following the Finance Commission formula for devolution, in addition to the earlier provisional settlement of Rs 35,000 crore made in February 2018.
The brilliant minds that had crafted the GST architecture and drafted the related statutes should have given a little thought to the fact that to roll out such a hugely complicated tax system driven entirely by technology was likely to create problems with dealers and traders who may not have touched a mouse or keyboard in their lives, and provided for an easier and more user-friendly alternative. They should also have recognised the problem of spillover of unadjusted amounts from one accounting year to the next. Fundamentally it is not different from what used to happen earlier in relation to the Central Sales Tax, which has now been subsumed in the IGST. Accretion and apportionment of IGST would always be an ongoing process and this fact needs to be recognized in the Act itself.
Article 269A of the Constitution, which provides that GST on inter-State supplies and imports shall be levied and collected by the Union and apportioned between the Union and the States, does not create a new tax, but only provides a mechanism for collection of CGST and SGST in the case of inter-state trade and imports. IGST all is not a different tax ~ part of it goes to the Consolidated Fund of India as CGST and the rest, more or less equal in amount, goes to the Consolidated Funds of the States, where the supply of goods and services have occurred, as SGST.
To keep the proceeds of IGST in the Consolidated Fund beyond a year or transfer the unallocated balance to the Public Account or any other account would be grossly illegal and unconstitutional. Pending their allocation, collections from the IGST are presently parked temporarily in the Consolidated Fund of India. The IGST Act does not provide for the eventuality that the collections from IGST may remain unapportioned beyond a year. In that event, the only viable alternative would be to treat the entire unallocated amount as CGST and take it to the Consolidated Fund of India, pending final adjustments. Once treated as CGST, 42 per cent of the net proceeds would automatically devolve to the States. Even though the adjustments might take some time, this will ensure that the States would get some of their dues at least in time.
The GST Council has a Constitutional status, having been provided for in the Constitution itself. Section 25 (1) of the IGST Act provides that the Government will act according to its recommendations in case of any difficulty during the next three years, of which one has already passed. The remaining two years should be judiciously utilised to identify intractable problems like this, attempt the most pragmatic solution and make necessary amendments to the Acts. The problem of unapportioned IGST demands urgent attention of the Council.
GST has been one of the most ambitious and path-breaking economic reforms ever undertaken in the country’s history. A disruptive reform of such monumental complexity has never before been attempted in our country. Among the few countries that have attempted such reform, none can come near India in terms of the complexity of federal structure, size and population, and the stupendous amount of diversity and asymmetry between its constituent parts. No wonder it has taken us nearly three decades of strenuous efforts to implement this transformational reform by working out a rare consensus in our political democracy.
Besides killing the Inspector Raj, GST has nudged a large part of the informal economy into the formal stream as seen from the high volume of about 40 lakh fresh registrations. Formalisation alone can give access to capital, skills and technology, and of course social security; presently all these are denied to the small dealers. The entry of 40 lakh new entities in the country’s tax net will also help increase direct tax collections. Despite reducing the rates of GST on a host of goods ever since its launch and bringing the number of goods under the 28 per cent bracket from 200 to only 50, collections have not decreased; in fact they have remained rather buoyant.
No tax system could claim to be flawless, and GST indeed has its own drawbacks and shortcomings. We only need to address them systematically and gradually so that the pains do not neutralize the gains. After all its turbulence and disruptions, maybe we are just beginning to reach the threshold when the benefits start outweighing the costs. The challenge is now to leverage its advantages to transform our economic landscape by setting the creative potential of our entrepreneurs and businesses free.
The writer is a commentator and also the lead author of the book, GST and Its Aftermath: Is Consumer the King?; Sage 2018. Opinions expressed are personal.