The realistic and possible rates at which the new regime can be implemented is
one of the most contentious questions in the talks around the goods and services
tax. Several attempts have been made to estimate the size of the tax base and
the revenue neutral rate that goes with it. The latest in the series is the
report of the Task Force on GST of the Thirteenth Finance Commission. The
majority of these exercises produce extremely low revenue neutral rates, raising
concerns about the accuracy of these estimates and the related revenue risk.
Further, GST was a revolutionizing reform in the tax structure of the country,
which came after long years of speculation and fears. It had several objectives
such as to create a common market with uniform tax rate in India that is why the
Slogan - One Nation, One Tax, One Market, and other objectives included: to
eliminate the cascading effect of taxes, GST allows set-off of prior taxes for
the same transactions as input tax credit and others, But A question that always
crops up in the minds of citizens is that: whether GST has stabilised the Indian
economy or destabilised it, with more repercussions.
This paper seeks to estimate the base for the proposed GST and validate the GST
reforms with the objectives, it aimed to achieve.
GST is the biggest reform for indirect taxes in India in the post-independence
period. It simplified indirect taxation, reduced tax complexities, removed the
cascading effect and led to one nation and one tax regime in India. Experts
believe that GST will have a huge positive impact on business and change the way
the economy functions.
A comprehensive multi-stage value-added tax (VAT) system, the Goods and Services
Tax (GST), was introduced in India on 1 July 2017. The GST encompasses various
indirect taxes from union and state tax bases. In a federal system, the
harmonisation of tax rules, regulations, rates, processes and procedures across
states is expected to improve the ease of doing business, encourage investment
and produce economic growth.
But the success of any tax reform depends on successful implementation and the
ease of tax compliance. Without GST system stability, it is difficult to comment
on the success of its revenue mobilisation. It has been acknowledged that GST
collection is falling short of the targets set in the Union Budget. The impact
of revenue uncertainty is not restricted to union finances alone - it will spill
over to state finances through tax devolution.
It is difficult to compare GST revenue collection with earlier systems of
taxation. Given that the data available in budget documents and the Finance
Accounts of state governments is disaggregated, it is not possible in pre-GST
regimes to separate the revenue from sales tax, VAT, Central Sales Tax and entry
tax into two separate baskets necessary for comparison.
These two baskets would
include items which are subsumed under GST and out-of-GST items (which includes
five petroleum products and alcoholic beverages for human consumption).
Revenue from Goods and Services Tax (GST) is not meeting budgetary targets for
last two financial years and therefore it is important to understand the reasons
behind shortfall in GST collection. Any shortfall in GST collection will not
only impact fiscal management of the union government but also it will spill
over to state finances in terms of lower tax devolution.
Structural changes made
in the GST, in terms of increasing GST threshold and reducing tax rates for a
large number of goods and services may have helped to moderate the impact of GST
on Indian economy, but the revenue impact of the policy decisions cannot be
negligible. In addition, revenue impacts of changes made in administrative
provisions and procedures in GST require assessment for future policy
Moreover, tax compliance under GST is not improving over time and therefore it
is further delaying stabilization of GST. There are many challenges that tax
administrations (both union and state tax authorities) are facing today in terms
of complexities of GST Rules and Regulations and getting access to information
for effective tax administration.
Given the revenue importance of GST in overall
public finance management in India, in-depth understanding the reasons for
revenue shortfall could help the government devise policies to overcome the
challenges. The challenges before Indian GST can be classified into design and
structural aspects of GST and tax administration and compliance related. In this
paper we assess compliance and revenue performance of states in GST and estimate
GST compliance gap.
A tax may be defined as a fee charged by a government on a product, income or an
activity. It is a pecuniary burden laid upon individuals or property owners to
support the Government, a payment exacted by legislative authority. A tax "is
not a voluntary payment or donation, but an enforced contribution, exacted
pursuant to legislative authority".
Taxes are broadly classified into direct and indirect taxes.
If a tax is levied directly on or wealth an individual or an
organization it is called direct tax. A direct tax is a kind of charge, which is
imposed directly on the taxpayer and paid directly to the Government by the
persons (juristic or natural) on whom it is imposed. An incidence of direct tax
cannot be shifted by the taxpayer to someone else. The burden of such tax is
borne by the payer of tax himself. An important direct tax imposed in India is
If tax is levied on the price of a good or service, then it is
indirect tax. The person paying the indirect tax passes on the incidence of tax
to some other person. He collects the tax from his customer on sale of goods and
services and remits it to the government. The ultimate burden of such tax falls
on the final consumer of such goods and services.
If the taxpayer (such as a
manufacturer or provider of service or seller of goods) is just a conduit and at
every stage the tax incidence is passed on till it finally reaches the consumer,
who really bears the brunt of it, such tax is indirect tax. An indirect tax is
one that can be shifted by the taxpayer to someone else. Indirect taxes are also
called consumption taxes, they are regressive in nature because they are not
based on the principle of ability to pay. All the consumers, including the
economically challenged bear the brunt of the indirect taxes equally.
Components of GST
There are three components of GST as follows:
- Central Goods and Services Tax (CGST):
Payable to the Central Government on
supply of goods and services within the State/Union Territory.
- State/Union Territory Goods and Services Tax (SGST/UTGST):
Payable to the
State/Union Territory Government on supply of goods and services within the
- Integrated Goods and Services Tax (IGST):
In case of inter-state supply of
goods and services, IGST is levied by the Government of India. Equivalent IGST
is also levied on imports into India. IGST shall be apportioned between the
Union and the States as per the provisions of IGST Act.
- GST Compensation Cess:
In addition to GST, a cess named GST Compensation Cess
can be levied on notified goods and services and currently such cess is levied
on pan masala, tobacco, aerated drinks, cars and coal.
The Constitution (One Hundred and Twenty Second Amendment) Bill, 2016, for
introduction of Goods and Services Tax in the country was passed by Rajya Sabha
on 3 August 2016 and by Lok Sabha on 8 August 2016. Consequent upon this, the
President of India accorded assent on 8 September 2016, and the same was
notified as the Constitution (One Hundred and First Amendment) Act, 2016.
The following Acts were passed for implementation of GST with effect from 1
- The CGST Act, 2017
- The UTGST Act, 2017,
- The IGST Act, 2017;
- The GST (Compensation to States) Act, 2017
The above Acts were assented by the President of India on 12 April 2017 and
enacted with effect from 1st July 2017. In addition to the above, each of the
States have also passed the SGST Act. All the above Acts were further amended
vide the CGST Amendment Act, 2018 and the GST (Compensation to States) Amendment
Act, 2018, the IGST (Amendment) Act, 2018 and the UTGST (Amendment) Act, 2018
notified on 29 August 2018 and made effective from 1 February 2019.
Status Of Indian Economy With GST
Indian Goods and Services Tax (GST) regime has almost crossed the transition
period (July 2017 to June 2022). So far performance assessment of GST covers
only overall GST collection in India. There are various aspects of GST which are
yet to be assessed with larger availability of GST data in the public domain.
Until recently, there was no state-level information on GST available in the
public domain to undertake performance assessment. With better understanding on
various components of GST collection and input tax credit (ITC) adjustment
mechanism, especially with reference to Integrated GST (IGST), present paper
attempts to undertake an in-depth performance assessment of GST both at the
union and state level and estimate compliance gap of GST.
Performance assessment of states in compliance and GST collection is important
for understanding on fiscal trajectory of state finances. State finance in India
is undergoing many structural changes which would impact inter-government fiscal
relations as well as fiscal autonomy of states. Tax base of states subsumed
under GST used to contribute a significant share in Own Tax Revenue (OTR)
mobilization and therefore revenue importance of GST in state finances is very
high. Unlike the union government, states have limited taxation power to cope
with any shortfall in GST collection.
Since continuation of GST compensation
beyond the transition period is uncertain (Mukherjee 2020), it will be always
important for states to protect their tax base and explore possibilities for
additional revenue mobilization from existing sources of tax and non-tax
revenues to meet ever increasing demands for public expenditures. Specific
objective of this paper is to understand state-level compliance and collection
in GST and estimate compliance gap.
- Evolution of GST in India:
France was the first country to implement GST in the year 1954. Within 62 years
of its advent, about 160 countries across the world have adopted GST because
this tax has the capacity to raise revenue in most transparent and natural
- Kelkar Task Force 2004:
The Finance Ministry of Government of India set up a Task Force under the
chairmanship Mr.Vijay Kelkar in 2004 on the implementation of Fiscal
Responsibility and Budget Management. It made recommendations to bring about a
radical transformation of the Indian Tax System. It disagreed with the existing
approach of the government to reduce government expenditure to achieve the
It has advised to go for a Revenue-led Approach which focuses on enhancing the
revenues instead of compressing the expenditure. It went further to suggest that
the Government should enhance capital expenditure in order to counterbalance the
contraction effects of fiscal consolidation. The Goods and Service Tax is an
outcome of the recommendations of the Task Force under the chairmanship of Mr.
Vijay Kelkar. In India the draft of Goods and Service Tax (GST) was presented in
the parliament in August, 2009.
- Initiative of NDA Government:
Subsequently, the then Union Finance Minister, Shri P. Chidambaram announced
that GST would be introduced from April 1, 2010. Since then, GST missed
several deadlines and continued to be shrouded by the clouds of uncertainty.
The talks of ushering in GST, however, gained momentum in the year 2014 when
the NDA Government tabled the Constitution. (122nd Amendment) Bill, 2014 on
GST in the Parliament on 19th December, 2014.
The Lok Sabha passed the Bill on 6th May, 2015 and Rajya Sabha on 3rd
August, 2016. Subsequent to ratification of the Bill by more than 50% of the
(122nd Amendment) Bill, 2014 received the assent of the President on 8th
September, 2016 and became Constitution (101st Amendment) Act, 2016, which
paved the way for introduction of GST in India. In the following year, on
27th March, 2017, the Central GST legislations - Central Goods and Services
Tax Bill, 2017 integrates Goods and Service Tax Bill, 2017, Union Territory
Goods and Services Tax Bill, 2017 and Goods and Services Tax (Compensation
to States) Bill, 2017 were introduced in Lok Sabha. Lok Sabha passed these bills on 29th
March, 2017 and with the receipt of the President's assent on 12th April, 2017,
the Bills were enacted.
- State GST Laws:
The enactment of the Central Acts was followed by the enactment of the State GST
laws by various State Legislatures. Telangana, Rajasthan, Chhattisgarh, Punjab,
Goa and Bihar were among the first ones to pass their respective State GST laws
GST is a path breaking indirect tax reform which will create a common national
market. GST has subsumed multiple indirect taxes like excise duty, service tax,
VAT, CST, luxury tax, entertainment tax, entry tax, etc.
- New factors in GST
Some of the notable factors introduced in GST, which were not there in the pre-GST
era, have been detailed below:
- GST Council
In terms of Article 279A (1) of the Constitution of India, as amended, the
President of India constituted the GST Council with effect from 12 September
2016. The GST Council is a constitutional body for making recommendations to the
Union and the State Governments on the issues related to GST. The GST Council, a
joint forum of the Centre and the States, is chaired by the Union Finance
Minister and members are the Union State Minister of Revenue or Finance and
Ministers in-charge of Finance or Taxation or any other Minister nominated by
each of the States.
As per Article 279A (4), the Council will make recommendations to the Union
and the States on:
- the taxes, cesses and surcharges levied by the Union, the States and the
local bodies which may be subsumed in the GST;
- the goods and services that may be subjected to, or exempted from GST;
- the model GST Laws, principles of levy, apportionment of GST levied on
inter-State trade supplies and the principles that govern the place of supply
- the threshold limit of turnover below which goods and services may be
exempted from GST;
- the rates including floor rates with bands of GST;
- any special rate or rates for a specified period, to raise additional
resources during any natural calamity or disaster;
- special provision with respect to the States of Arunachal Pradesh, Assam,
Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura,
Himachal Pradesh and Uttarakhand; and
- Any other matter relating to the GST, as the Council may decide.
While discharging the functions conferred by this article, the GST Council shall
be guided by the need for a harmonised structure of goods and services and for
the development of a harmonised national market for goods and services.
- Goods and Services Tax Network
Goods and Services Tax Network (GSTN) was registered on 28 March 2013 under
Section 8 of the Companies Act, 2013 as a Non-Government Company and a 'Not for
Profit Organisation'. It was formed to provide common and shared Information
Technology (IT) infrastructure and services to the Central and State
Governments, taxpayers and other stakeholders for implementation of the GST.
The Government of India holds 24.5 per cent equity in GSTN and all the States of
the Indian Union, including NCT of Delhi and Puducherry and the Council,
together hold another 24.5 per cent. The balance 51 per cent equity is with
Non-Government financial institutions. It was decided (May 2018) to convert GSTN
into a fully owned Government Company. Further action on this decision was yet
to be taken by the Government. The objectives and organizational structure have
been further detailed in Chapter III of this report.
- Cross empowerment and distribution of taxpayers
Under GST, the taxpayers have to obtain separate registration in each State
where they operate. A single challan is generated for paying all taxes of GST
(viz. CGST, IGST, SGST and UTGST) under each registration and one single return
is filed for both the central and state taxes. In view of this dual control, the
GST Acts provide for cross empowerment of the Central and State tax officers to
administer all the components of GST viz. CGST, SGST, UTGST and IGST.
The tax officers carry out administration of all components of GST in respect of
the taxpayers or specific areas allocated to them. While the State Commercial
tax departments are responsible for administering functions assigned to the
States, the Central Board of Indirect Taxes and Customs (CBIC) and its field
formations carry out functions assigned to the Centre.
As per circular of the GST Council dated 20 September 2017, the following
criteria should be followed for the division of taxpayer base registered in
a State between the Centre and the State to ensure single interface:
- Of the total number of taxpayers with turnover below 1.5 crore, all the
administrative control over 90 per cent of the taxpayers shall vest with the
State3 tax administration and 10 per cent with the Central tax administration;
- In respect of the taxpayers with turnover above 1.5 crore, all the
administrative control shall be divided equally in the ratio of 50 per cent each
for the Central and the State tax administration;
- The division of taxpayers in each State shall be done by computer at the
State level based on stratified random sampling and could also take into
account the geographical location and type of the taxpayers, as may be
The State tax officers have been empowered (October 2017) to grant refund of
IGST and CGST and similar instructions on the State side were also issued
empowering the Central tax officers to grant refund of SGST. The GST Council in
its 9th meeting (16 January 2017) recommended that both the Central and State
tax administrations shall have the power to take intelligence-based enforcement
action in respect of the entire value chain and CBIC gave effect to this
decision through a DO letter issued (October 2018) to its field formations.
- Concerns regarding GST
- Lack of preparedness:
The understanding of the provisions of GST is still at a
nascent stage for many people engaged in business. They are still trying to
assess the mandated GST compliance provisions that their relevant functional
departments (such as IT Department, Legal department) need to adhere to.
- Compliance related issues:
Businesses need to file multiple returns which may
increase manifold in accordance with business models. Clients will need to
ensure timely compliance by registered suppliers to ensure there is no loss of
input credit. This will necessitate correct data and reports to fill accurate GST returns.
- Increased costs due to software purchase:
Businesses have to either update
their existing accounting or ERP software to a GST-compliant software or buy a
GST software so that they can keep their business going. Both the options lead
to increased cost of software purchase and training of employees for an
efficient utilization of the new billing software.
- Small businesses:
Small and medium-sized enterprises (SMEs) who have not yet
signed for GST have to quickly grasp the nuances of the GST tax regime. They
will have to issue GST-complaint invoices, be compliant to digital
record-keeping, and of course, file timely returns. This means that the
GST-complaint invoice issued must have mandatory details such as GSTIN, place of
supply, HSN codes, and others.
- Lack of skilled resources and re-skilling existing workforce:
As GST has been
introduced recently, skilled staff with complete and updated subject knowledge
of GST is not easily available. This has resulted in an urgent need for adequate
skilled human resources well-versed with GST to ensure swift implementation. In
addition, businesses will need to re-train their employees in GST compliance,
further increasing their overhead expenses.
- Multiple rate structure:
The GST presently has a four slab structure with tax
rates kept at 5%, 12%, 18% and 28%. The multiple tax structure has been
justified on the ground that necessary items of mass consumption should be taxed
at a lower rate while luxury items should be taxed at higher rates. However,
multiple rates are likely to increase administrative complexity as well as
create classification disputes. Such a system makes it difficult to evaluate the
overall effects of the tax design.
India - Before & After GST Regime
The Goods and Services Tax's 14-year journey came to an end on July 1, 2017,
with the introduction of what was billed as the country's biggest tax reform in
70 years of independence. While the central government was confident in its
ability to establish the GST as a Good and Simple Tax, many others opposed it,
seeing it as a half-baked GST regime imposed on taxpayers.
The implementation of the Goods and Service Tax (GST) has transformed the
economy into a digital and standardised one, allowing for a seamless flow of
information and the availability of a common set of data to both the Centre and
the States, allowing for more efficient Direct and Indirect Tax collection.
However, revenue statistics show that GST has failed to make an impact and has
slowed India's economic growth. A comparison of pre- GST era and post-GST
era will be used to verify the above statement.
Gross Domestic Product Comparison: 2014-2020
According to the data as recorded by central statistical organisation, the GDP
Growth of India in 2013-14 was 4.74 at factor cost. The Services sector boomed
with a growth of 6.78%. However, World Bank recorded the GDP Growth rate of
India at 7.41.
Real GDP or GDP at constant (2011-12) prices for the year 2015-16 is now
estimated at `113.50 lakh crore (`113.51 lakh crore estimated earlier on
8th February, 2016), showing a growth rate of 7.6 percent (similar to 7.6
percent estimated earlier) over the First Revised Estimates of GDP for the year
2014-15 of ` 105.52 lakh crore, released on 29th January 2016.
Real GVA, i.e., GVA at basic constant (2011-12) prices for the year 2015-16 is
now estimated at `104.27 lakh crore (as against `104.38 lakh crore estimated
earlier on 8th February, 2016), showing a growth rate of 7.2 percent (as against
7.3 percent estimated earlier over the First Revised Estimates of GVA for the
year 2014-15 of `97.27 lakh crore, released on 29th January 2016.
The sectors which registered growth rate of over 7.0 percent are 'financial,
real estate and professional services' (10.3 percent), manufacturing (9.3
percent), 'trade, hotels, transport, communication and services related to
broadcasting' (9.0 percent), and 'mining and quarrying' (7.4 percent). The
growth in the 'agriculture, forestry and fishing', 'construction', 'electricity,
gas, water supply & other utility services', 'public administration, defence and
other services' is estimated to be 1.2 per cent, 3.9 per cent, 6.6 per cent and
6.6 per cent respectively.
GDP at constant (2011-12) prices in Q2 of 2017-18 is estimated at `31.66 lakh
crore, as against `29.79 lakh crore in Q2 of 2016-17, showing a growth rate of
6.3 percent. Quarterly GVA at Basic Price at constant (2011-12) prices for Q2 of
2017-18 is estimated at `29.18 lakh crore, as against `27.51 lakh crore in Q2 of
2016-17, showing a growth rate of 6.1 percent over the corresponding quarter of
The economic activities which registered growth of over 6.0 percent in Q2 of
2017-18 over Q2 of 2016-17 are 'manufacturing', 'electricity, gas, water supply
& other utility services and 'trade, hotels, transport & communication and
services related to broadcasting'. The growth in the 'agriculture, forestry and
fishing', 'mining and quarrying', 'construction' 'financial, insurance, real
estate and professional services' and 'Public administration, defence & other
services' is estimated to be 1.7 percent, 5.5 percent, 2.6 per cent, 5.7 percent
and 6.0 percent respectively, during this period.
GDP at constant (2011-12) prices in Q1 of 2018-19 is estimated at ` 33.74 lakh
crore, as against ` 31.18 lakh crore in Q1 of 2017-18, showing a growth rate of
8.2 percent. Quarterly GVA at basic price at constant (2011-2012) prices for Q1
of 2018-19 is estimated at ` 31.63 lakh crore, as against ` 29.29 lakh crore in
Q1 of 2017-18, showing a growth rate of 8.0 percent over the corresponding
quarter of previous year.
The economic activities which registered growth of over 7 percent in Q1 of
2018-19 over Q1 of 2017-18 are 'manufacturing, 'electricity, gas, water supply &
other utility services' 'construction' and 'public administration, defence and
other services'. The growth in the 'agriculture, forestry and fishing', 'mining
and quarrying', 'Trade, hotels, transport, communication and services related to
broadcasting' and financial, real estate and professional services is estimated
to be 5.3 percent, 0.1 percent, 6.7 percent, and 6.5 percent respectively during
GDP Data AssessmentThere is now only one tax rate for all, resulting in a unified market in terms
of tax application and frictionless goods and service transactions among states.
The transaction will be less expensive as a result of this. According to a
report, road transport enterprises are subject to ten to eleven different forms
of taxes. As a result, the GST will assist in lowering transportation costs by
removing other taxes.
Because there will be no cascading effect of taxes on goods and services after
the implementation of GST, exports of goods and services will become more
competitive. According to a study conducted by NCAER, GST will be the most
significant change in the Indian economy, increasing GDP by 1.0 to 3.0%. GST is
more transparent in comparison to the previous law provision so it will generate
more revenue to the Government and will be more effective in reducing corruption
at the same time. Overall GST will improve the tax Compliances.
According to a research released by the Finance Ministry, the GST structure will
benefit the Make in India initiative more due to the availability of input tax
credit on capital goods. Because the GST will subsume all other taxes, the
excise duty exemption given to manufacturers will be eliminated, resulting in an
increase in government income and possibly an increase in GDP.
The GST regime has a significant impact on a variety of factors, including GDP.
The Gross Domestic Product (GDP) has a tendency to shadow over the revenue
earned by the economy over the course of a year. Still, a worthwhile point
includes that the GST has the capability to extend the GDP by a total of 2
percent in order to complete the ultimate goal of increasing the per-capita
income of every individual.
Furthermore, the GST scheme will undoubtedly improve the government's indirect
income by enhancing and enforcing tax compliance, hence expanding the tax-paying
base and increasing revenue. The government's additional revenue will be
directed toward development projects and urban funding, resulting in an overall
Negative ImpactIn a report, DBS bank noted that initially, GST will lead to the rise in
inflation rate which will remain for a year but after that GST will affect
positively on the economy. As we know Real Estate also plays an important role
in Indian economy but some expert thinks that GST will impact the Real Estate
business negatively as it will add up the additional 8 to 10 percent to the cost
and reduce the demand about 12 percent.
GST is applied in the form of IGST, CGST AND SGST on the Centre and State
Government, but some economists say that there is nothing new in the form of GST
although these are the new names of Central Excise, VAT, CST and Service Tax
etc. As every coin has two faces in the same way we tried here to familiarize
the things related to GST with both perspective i.e. positively and negatively
in this article. Despite having some factor which is being expected to affect
the Economy adversely there are so many other things which are expected with a
positive impact on GDP.
Overall Revenue Performance Of GST
Gross Value Added (GVA) (at basic prices, current prices, 2011-12 series) for Q4
of 2019-20 is estimated residually by subtracting sum of GVA during Q1 to Q3 of
2019-20 from the 2nd Advance Estimate of GVA for 2019-20, which is brought out
by National Accounts Division of the Central Statistical Office (CSO) on 28
We have also estimated total GST collection (comprising of SGST, CGST, IGST and
GST Compensation Cess) for 2019- 20 by applying annual average of average
quarterly GST collection (as % of GVA) of 2017-18 (i.e., 6.99%) and 2018-19
(i.e., 6.93%) on 2nd advance estimate of GVA for 2019-20. GST collection for Q4
of 2019-20 is estimated residually by subtracting sum of GST collection during
Q1 to Q3 of 2019-20 (i.e., Rs. 905,313 Crore) from the estimated full year's GST
collection of 2019-20 (i.e., Rs. 1,286,853 Crore). GST collection during Q4 of
2019-20 is estimated to be Rs. 381,540 Crore.
In the month of January 2020, Rs. 105,366 Crore of GST collection is reported.
Therefore, the balance GST collection during Q4 of 2019-20 is estimated to be
Rs. 276,174 Crore. Bunching of GST collection (or GST payment) is observed
during Q4 of last two financial years (2017-18 and 2018-19). It is also expected
that similar bunching will be experienced during Q4 of 2019-20. Since tax
buoyancy of GST collection is volatile, we avoided projection of GST collection
based on tax buoyancy.
GST revenue shortfall may arise due to problems associated with the design and
structure of GST, policies and practices of GST administration and tax
compliance. The multiple rate structure may have helped to moderate GST
incidence across different segments of society but it is prone to classification
disputes and tax evasion. Frequent reductions in GST rates may have improved tax
compliance, but the revenue implications cannot be ignored. Frequent changes in
the compliance requirements, processes and procedures may also delay
stabilisation of the GST system.
There are several GST provisions which have not yet been adopted in practice. In
the 32nd GST Council Meeting a decision was made to extend the annual turnover
limit for GST registration under the composition scheme from Rs 10 million
(US$140,000) to Rs 15 million (US$210,000) and to allow annual return
submission. The tax rate for manufacturers under the composition scheme has been
reduced from 2 per cent to 1 per cent.
The annual turnover limit for the composition scheme for services or mixed
suppliers was extended to Rs 5 million (US$72,000) with a composition rate of 6
per cent. The GST threshold limit was extended from Rs 2 million (US$29,000) to
Rs 4 million (US$57,000).
The revenue implications of these decisions are not notional or negligible - GST
revenue collection is expected to bear the burden of these policy
decisions. This will impact the Union's finances through higher compensation
payment obligations in cases where states' GST collection falls below a 14 per
cent annual growth rate (the rate of net revenue collected by the state from
taxes subsumed under GST in the base year 2015–16).
On-time filing of returns is desirable to achieve stability in the tax
compliance regime. The introduction of any new system of filing returns may
impose additional costs for tax compliance such as procuring new software and
training personnel to comply with a new system. This will further delay
stabilisation of the GST return submission system.
Tax evasion could be contributing to a shortfall in GST revenue collection.
Claiming input tax credit against fake invoices is the most common method of tax
evasion. Under-invoicing is the result of collusive tax evasion mechanisms -
sellers and purchasers mutually agree to under-report the value of
transactions. To combat tax evasion, e-way bills were introduced in April 2018
to capture information on the movements of goods. But effective enforcement of
the e-way bill system demands intensive monitoring, so revenue leakage cannot be
Advantages Of GST
The key features of the proposed GST provide a very interesting and useful first
reference for any discussion of GST in India.
The key features can be summarised
- Dual GST:
A central and state GST to apply on the same base. Each tax would
operate on the principles of input tax credit, where tax credit for each tax
would be self-contained. No cross-credit would be allowed except in the case of
interstate transactions. - For interstate transactions, the discussion paper
proposes a regime called IGST, wherein the exporter charges IGST in place of the
GST in such transactions, claims input tax credit for any taxes paid, and remits
the balance to the central government. The exporting state remits any local
taxes that are claimed as credit by the exporter to the central
government/central administrator. In the importing state, the importing dealer
is allowed to claim tax credit for the IGST paid from the central
government. The claims across states will be cleared by a central clearing house
kind of mechanism. It is proposed to cover both b-b and b-c transactions.
- Multiple Statutes:
One for the centre and one each for the states. To the
extent feasible, uniform procedure for collection of both CGST and SGST would be
prescribed in the respective legislation: while separate returns are mandated
for the two taxes, it is proposed to aim for a common format.
- Tax administration by respective tax departments:
Timely refund where credit
accumulation takes place to be avoided by design where feasible. Pan-linked
taxpayer identification number, to allow for easy sharing of information across
the different tax administrations, including income tax.
Way Forward For India
We adopt the estimates provided in the CEA Report for 2013-14 in the absence of
any updated estimates of revenue under consideration from GST and respective
shares of the Centre and States in total GST collection. We employ a basic
revenue projection method based on the annual GDP growth rate. In this case, we
assume that tax stability is unitary and stable throughout time.
Therefore, monthly revenue from GST is expected to be Rs. 109,616 Crore during
2017-18. Gap in monthly GST collection will vary between Rs. 19,616 Crore to
Rs. 29,616 crore if monthly revenue collection varies from Rs. 90,000 Crore to
Rs. 80,000 Crore. This shows that there is considerable shortfall in GST revenue
collection and it demands an in-depth analysis to identify reasons for such
Indirect tax growth dropped to 5.80 percent in 2017-18, compared to 21.33
percent the previous year. The Centre's revenue on goods and services (except
Central Excise on Petroleum and Tobacco) fell 10% in 2017-18 compared to revenue
from subsumed taxes in 2016-17 after the adoption of GST. The Government of
India used the Finance Commission formula to devolve the IGST year-end balance
to the States, which is in violation of the Constitution of India and the IGST
Act. This also has the effect of distributing funds to the States on a
completely different basis from the IGST Act's "Place of Supply" idea.
2017-18, there was a brief transfer of'6,466 crore of GST Compensation Cess to
the Public Account.
While it was expected that compliance would improve as the system stabilised,
from April to December 2018, all returns filed (GSTR-1, 3B, 4, 5A, and 6) showed
a downward trend in filing. The filing percentage of GSTR-1 returns were
throughout less in comparison to the corresponding filing of GSTR-3B returns.
The implementation of GSTR-3B led to the filing of returns with unsourced ITC
claims, and also appears to have discouraged the filing of even GSTR-1. Because
GSTR-1 filing is required, short-filing is a source of concern that must be
addressed. Due to the fact that GSTR-3B is merely a summary return, short-filing
of GSTR-1 meant that tax departments did not receive entire invoice level
details as filed by suppliers, which could be used to validate GSTR-3B details
or calculate turnover.
- Mukherjee, S. (2020), "Possible Impact of Withdrawal of GST Compensation Post
GST Compensation Period on Indian State Finances", NIPFP Working Paper No. 291.
New Delhi: National Institute of Public Finance and Policy (NIPFP), January
- Mukherjee, S. (2019a), "Issues of Compliance in GST - Reflecting on the CAG's
Report", Economic and Political Weekly, 54(47): 22-24.
- Mukherjee, S. (2019b), "Whether States have Capacity to Sustain Projected
Growth in GST Collection during the Compensation Period?", NIPFP Working Paper
No. 275. New Delhi: National Institute of Public Finance and Policy (NIPFP),
- Mukherjee, S. (2019c), "Value Added Tax Efficiency across Indian States: Panel
Stochastic Frontier Analysis", Economic and Political Weekly, 54(22):40-50,
- Mukherjee, S. and R. Kavita Rao (2019), "Fiscal Implications of Introduction
of Goods and Services Tax in India", Report Submitted to the Fifteenth Finance
Commission, National Institute of Public Finance and Policy (NIPFP), New Delhi.
- Mukherjee, S. and R. Kavita Rao (2017), "Estimating Unaccounted Income in
India: Using Transport as a Universal Input", Economic and Political Weekly,
- Nerudova, D. and M. Dobranschi (2019), "Alternative method to measure the VAT
gap in the EU: Stochastic tax frontier model approach. PLOS ONE, 14(1):
- Central Goods and Services Tax Act, 2017.
- State Goods and Services Tax Act, 2017
- Integrated Goods and Services Tax (Extension to Jammu and Kashmir Act,
- Goods and Services Tax (Compensation to States) Act, 2017
Written By: Riya Jain