Sharp fall in GST collections causes concern: how will Jaitley clean up the economy?

The government has been putting up a brave front before the public on the Goods and Services Tax (GST) revenue collections, but in reality things are going awry. The monthly revenue from GST for October slipped to Rs 83,346 crore, the lowest level since July this year, when the 'one nation, one tax' regime was implemented.

According to government data, 50.1 lakh returns have been filed for the month of October till 26 November, as against 57.3 lakh returns filed for September, 58.9 lakh for August and 58.7 lakh returns for July.

What makes matters more grave is the fact that the markets did not perform well during the Diwali season, despite it being one of India's biggest festivals and one which boosts sales across retail platforms.

The lower number of returns is inversely proportional to the number of penalties issued against traders, unless the government decides to waive it off.

Earlier, the union government had waived penalty on delayed filing of initial GST returns for August and September despite the fact that penalty waivers lead to a long-term problem of tax compliance as traders begin to delay filing returns in the hope of getting the same leeway every month.

Compensation for states

As per the terms of agreement between the states and the Centre, the latter will compensate the former for any shortfall in revenue over the next five years.

The loss of revenue to a state will be the difference between the actual revenue collection to a state under the GST regime and the tax revenue it would have garnered under the old indirect tax regime after considering a 14% increase over the base year of 2015-16.

While the Centre is collecting funds for compensating the states through cess on luxury and sin items, there is a limit to the amount of money that can be raised through such a mechanism.

The decline in GST revenue is on account of utilisation of already collected integrated GST as credit against Central GST and State GST along with a lower tax incidence on items in the GST regime.

Ever since the implementation of the GST, the union government has struggled to find the right balance between tax rates, infrastructural support and ease of filing returns.

On 6 October, the government announced lowering of tax rates on 27 products and a few services.

On 10 November, the GST council further decided to keep only 50 of over 220 items under the 28% slab.

The impact of the 10 November decision would be visible in the next month's numbers as the government estimates suggest a Rs 20,000 crore hit over the full financial year.

Fiscal expansion or expenditure cuts?

While Finance minister Arun Jaitley has maintained that his government would not deviate from the fiscal deficit target of 3.2% for the current fiscal, given the current level of tax compliance, he may be forced to deviate from his statement.

However, given the high stakes associated with maintaining the fiscal deficit targets, especially in the backdrop of credit ratings agency Moody's recent upgrade on India's sovereign rating, the government may be forced to go expenditure cuts in the final month of the current fiscal.

But such a step may directly risk India's growth prospects especially at a time when the private sector investments are not coming in.

It would be interesting to see, how Jaitley juggles between difficult choices of fiscal prudence, tax compliance and growth in the coming months.