State of Tax Revenue Performance and Policy Reforms Issues

State of the Fisc- Tax Revenues

Performance 2019-20 and Policy Agenda

CENTRAL GOVERNMENT’S TAX REVENUES BUDGETED TO GROW AT 25.26% IN 2019-20 OVER THE ACTUAL/PROVISIONAL TAX REVENUES OF 2018-19

Tax revenues to the Centre (both direct and indirect taxes together) for FY 2019-20 was estimated at Rs. 16.50 lakh crore (7.82% of projected GDP FY 2019-20). At the time of presentation of final Budget 2019-20 in July, the actual tax receipts of 2018-19 had turned out to be much lower than what was projected during Interim Budget. The tax revenues were estimated to grow, over Revised Estimates of 2018-19 (Rs. 14.84 lakh crore), by 11.13% only as presented during Interim Budget and carried as such in the Final Budget presented in July following the convention and constitutional requirement). However, provisional accounts (close to actuals) tax receipts in 2018-19 came to only Rs. 13.17 lakh crore, a fall of Rs. 1.67 lakh crore or 11.29% less than the Revised Estimates. Compared with the provisional/actual tax revenues of the Centre for 2018-19, the estimated tax revenues for FY 2019-20 are Rs. 3.33 lakh crore higher amounting to a growth of 25.26%. Tax revenue growth asking rate, in the context of actuals of 2018-19, was certainly quite ambitious.

The States have a share of 42% in the tax revenues of the Central Government, exclusive of cesses and surcharges. Gross tax revenues (GTR) of the Centre (before deducting the share of state governments) was estimated at Rs.24.59 lakh crore for FY2019-20 or 11.65% of the projected GDP of 211 lakh crore.

The share of States indicated in the Receipt Budget 2019-20 is Rs. 8.09 lakh crore, which is 32.91% of the Gross Tax Revenues (GTR) estimated. At 42% of the Gross Tax Revenues, the share of States would be Rs. 10.32 lakh crore, higher by Rs. 2.24 lakh crore over the budgeted amount. Smaller actual share of the States is largely because there are quite a few cesses and surcharges, most notable being the Road and Infrastructure Cess (BE Rs. 1.27 lakh crore levied as Special Excise Duty) and Health and Education Cess (BE Rs. 56121 crore), which are not shared with the States.

Two principal sources of direct tax revenues- Corporation Income Tax (CIT) and Personal Income Tax (PIT) - together are budgeted to contribute Rs. 13.35 lakh crore (Corporate Income Tax Rs. 7.66 lakh crore and Personal Income Tax Rs. 5.69 lakh crore) in 2019-20. The Government had collected Rs. 11.25 lakh crore from Direct Taxes in the year 2018-19 (provisional estimates). Direct Taxes are thus budgeted to grow by Rs. 2.10 lakh crore or 18.64% over provisional/actuals of 2018-19. Corporation Tax was budgeted to grow at 15.44% over actuals/provisional collection of Rs. 6.64 lakh crore in 2018-19. Personal Income Taxes were budgeted to grow at a relatively higher rate of 23.25% over actual/provisional collection of Rs. 4.63 lakh crore in 2018-19.

Central Government has three principal sources of Indirect Taxes- Goods and Services Tax (GST, excluding State GST which goes directly in the Consolidated Fund of the States), Excise Duties (essentially on petroleum products), and Customs Duty.

Total Customs revenues were budgeted to bring in gross receipts of Rs. 1.56 lakh crore (provisional/actual 2018-19 Rs.1.18 lakh crore; i.e. at a growth of over 32%).

Excise Duties were budgeted at Rs. 3.0 lakh crore for 2019-20 (provisional/actual 2018-19 Rs. 2.31 lakh crore; a growth of 29.87%).

GST budgeting is a little more complicated. GST receipts are primarily in four accounts- State GST (SGST) and Union Territories GST, Central GST (CGST), Integrated GST over Inter-State and Import transactions (IGST) and Compensation Cess (to pay for the shortfall in the assured compounded growth of 14% for the States). CGST, IGST (year end balance), Compensation Cess and Union Territories GST are budgeted by the Central Government.

SGST revenue is budgeted only by the States as this receipt is directly credited to States’ respective Consolidated Funds.

IGST is first credited in the Consolidated Fund of the Union and then distributed as per the IGST rules of allocation. An adhoc approach has been followed towards treating the balance of IGST in the Consolidated Fund of India at the end of the financial year. In 2017-18, the IGST balance, a large amount of Rs. 1.77 lakh crore, was treated as Centre’s receipts and a share of 42% was transferred to the States on the pattern of transfer of the share of states in central taxes. In 2018-19, most of the IGST was divided between the Centre and the States during the course of year and only a small amount of Rs. 28947 crore remained as balance in the Consolidated Fund of India. This amount was neither divided between the Centre and the States nor its 42% share transferred as their share to the States.

The Compensation Cess balance at the end of the year is required to be transferred to the Public Account as per the provisions of the Compensation Cess Act and Rules made thereunder. As far as budgeting/accounting of the GST Compensation Cess is concerned, entire gross receipt of Cess is treated as tax revenue receipt in the budgets/ accounts of the Government of India. The amount to be transferred to the States to pay the Compensation Cess is budgeted on the Expenditure side as ‘Other Transfers’.

For the year, 2019-20, the total amount budgeted as receipts for GST is Rs. 6.63 lakh crore. This comprises Rs. 5.26 lakh crore of CGST receipts, 28000 crore of IGST undistributed balance at the end of the year and Rs. 1.09 lakh crore of Compensation Cess and a small amount of UTGST. CGST receipts of Rs. 5.26 lakh crore, compared to actuals/ provisional of Rs. 4.58 lakh crore, provide for a growth of only 14.96% year on year.

To summarise budgeting, “Net Tax Revenues to the Centre” was budgeted at Rs.16.50 lakh crore, an increase of Rs. 3.33 lakh crore over the provisional net tax revenues of Rs. 13.17 lakh crore, projecting a growth of 25.26%. Corporation Income Taxes (CIT) budgeted at Rs. 7.66 crore (growth rate15.44%), Personal Income Taxes at Rs. 4.69 lakh crore (growth rate 23.25%), CGST at Rs. 5.26 lakh crore (growth rate 14.96%), Customs at Rs. 1.56 lakh crore (growth rate 32%) and Excise at Rs. 3.0 lakh crore (growth rate 29.87%).

PERFORMANCE OF CORPORATE INCOME TAX (CIT)

A stiff target in 2019-20

CIT, which had a poor growth rate in the three years of 2014-15, 2015-16 and 2016-17 (growth rates of only 8.68%, 5.67% and 6.99% in), rose sharply post demonetization in 2017-18 growing at 17.79% to Rs. 5.71 lakh crore in 2017-18. While the Revised Estimates of Rs. 6.71 lakh crore were not achieved in 2018-19, yet the CIT growth at 16.17% was quite impressive. In this background of good CIT performance in last two years, target of CIT of Rs. 7.66 lakh crore (growth rate of 15.44% over actuals of 2018-19) would have appeared quite reasonable and achievable at the time of presentation of budget in July 2019.

Made completely unachievable by the corporate tax cut announced post budget

Government announced massive cuts in corporate taxes on 20^th September 2019. Advance Corporate taxes are deposited in significant amounts on 15^th September, 15^th December and 15^th March. Tax cuts announced on 20^th September did not have much impact on CIT collections until September end or in the first half year of the current FY. Actual CIT collected during this period was Rs. 249327 crore, which was only 2.29% higher than the CIT of Rs. 243742 crore collected in H1FY19. As hardly any significant change had been made in the Budget 2019-20 affecting CIT, this disappointingly lower collection could be attributable to only two major reasons- slowdown of economy affecting corporate profits and increase in refunds of extra CIT collected in previous year. As GDP growth in nominal terms has been estimated to be only 7.5% this year, it is unlikely that CIT would have grown by any higher rate in the remaining financial year.

It is in this context, Government’s decision of 20^th September, reducing basic corporate tax rate from 30% to 22% for all companies and to 15% for new manufacturing companies need to be assessed. Taxation Laws (Amendment) Bill, 2019, passed by the Parliament on December 5, 2019, made a number of significant changes:

a.    Domestic companies, with annual turnover of up to Rs. 250 crore were required to pay CIT at 30% (25% for the rest of companies) until year 2018-19 (assessment year 2019-20). This limit was raised to Rs. 400 crore in July 2019 when the main budget was presented. By this Amendment Law, all domestic companies have been given an option to pay tax at only 22% if they do not avail certain deductions. The health surcharge of 15% continues to apply. Effective rate of CIT for such companies has therefore become 25.17%.

b.    For domestic manufacturing companies, registered after September 30, 2019 and setting up and starting a new manufacturing facility before April 1, 20123, and again not availing certain specified deductions, the CIT rate was brought down to 15%.

c.    Major deductions which were to be disallowed to companies opting for lower CIT rates included a. deduction for new units in SEZ, b. investment in new plant and machinery in notified backward areas, c. expenditure on scientific research, agriculture extension etc. and d. depreciation of new plant and machinery in certain cases.

d.    Existing companies were given the option to choose moving to new lower tax rates regime from any year at their option, which would be irreversible when exercised.

e.    Significant changes were made in the Minimum Alternate Tax (MAT) applicable on Companies. No MAT was leviable on companies opting for lower corporate income tax rates of 22% and 15%. For other companies, the MAT rates were reduced from 18.5% to 15%.

Government issued a Press Statement titled “Corporate tax rates slashed to 22% for domestic companies and 15% for new domestic manufacturing companies and other fiscal reliefs” on 20^th September 2019, which cited “in order to promote growth and investments” as justification for slashing normal corporate tax rate to 22% and “in order to attract fresh investment in manufacturing and thereby provide boost to ‘Make in India’ to offer still lower corporate tax rate of 15% for new manufacturing companies. Government estimated “total revenue foregone for the reduction in corporate tax rate and other relief at Rs. 1,45,000 crore”. Government, however, did not provide any basis for the estimate of revenue foregone of Rs. 145000 crore.

There is possibly no way to estimate what tax loss would actually be as no one knows how many companies and with what profitability and tax profile will opt for this new taxation regime in financial year 2019-20. This will probably be clearer only by the end of the financial year. One consequence is, however, quite obvious. Most of the tax foregone would be from the existing companies as very no profits are expected to be generated by “new” manufacturing companies during the current financial year. In that sense, this year at least, corporate tax foregone would be straight transfer from the fisc to the Corporates’ balance sheet. That was immediately realized by the stock markets, which reset the equity prices based on price earning multiple on newly expected corporate profits.

An absolutely necessary measure but half measure and not well targeted

Government published a ‘Statement of Revenue Impact of Tax Incentives under the Central System’ [Annex-7 of Revenue Receipts 2019-20]. This analysis is basically for financial year 2017-18. In the ordinary course of reporting, the impact of corporate rate cuts announced on 20^th September 2019, may not be reported in the ensuing Budget 2020-21. This issue, however, is quite material and significant. The Government should publish their detailed assessment of the impact of this measure in 2020-21 Budget.

The same statement reports that there were 1,30,676 manufacturing companies (15.53%) out of total return filing companies of 8,41,687 in 2018-19 for the financial year 2017-18. These manufacturing companies had a total share of 38.92% in total profits and 36.74% share in total tax liability. Their effective tax liability was 27.83%. These companies would not get the benefit of lower tax rate of 15% available to new manufacturing companies. This would certainly make these companies quite unhappy. These are the companies which have most likely set up new manufacturing plants, some of which might actually be the work in progress. It is quite likely that these companies would shift new manufacturing facilities in new companies to avail of the lower corporate tax rates.

7.11 lakh non-manufacturing companies, having a share of 61% in profits and 63% in tax liability, had a higher effective tax rate of 30.55%. Sooner or later, these companies are also likely to complain of the discrimination against them. These companies are mostly in services, where employment is much higher than the manufacturing and India’s competitiveness also much better. It might be difficult or even undesirable to deny them the benefit of lower corporate tax rates for long.

The Statement referred above also informs that ‘large business is also organised as partnership firms and Association of Persons [AOPs] or Body of Individuals [BOIs] and there are 14.38 lakh such entities which filed returns for income of FY 2017-18. These firms reported Rs. 1,95,669 crore as profits before taxes, declared a taxable income of Rs. 1,76,905 crore and paid tax of Rs. 52737 crore. These firms suffer income tax at the highest rates applicable to individuals. It would not be unfair to assume that many of these firms would want to convert into companies and those which have manufacturing plans might try to shift their old/new manufacturing facilities into new manufacturing companies to avail the lowest applicable tax rate of 15%.

Short term impact of these two bold measures (general corporate tax rate reduction to 22% and for manufacturing companies to 15%) is likely to be clear loss in revenue. In the medium term, there would be pressure for extending the lower rate of 15% to non-manufacturing companies, thereby regressing the Corporate tax rate to 15% for all. It’s impact on advancing manufacturing in the country will have to be seen and assessed in next few years.

A possible alternative could have been to extend the concessional corporate tax rate of 15% effectively to manufacturing businesses relocating from outside India and exporting bulk of the produce made. It would have possibly made the tax give away as quite targeted and would have appeared as offering real competitive advantage. In the absence thereof, it is going to be seen as broad-based general measure and may still attract some companies to shift manufacturing base to India. However, lot more of advantage is likely to be taken by existing companies shifting their manufacturing to new companies and non-corporate firms to convert into companies to claim lower corporate tax rates for both companies in general and new manufacturing companies in particular.

Performance of Corporate taxes during the year 2019-20

Taking into account the trends of the corporate tax collections until November (a little lower than actual collections of last year- Rs. 2.89 lakh crore at November end 2019 as against Rs. 2.91 lakh crore at end November 2018), it seems that the corporate tax collections in 2019-20 would be less than the tax collected last year (Rs.6.64 lakh crore) even in absolute numbers. Last year an amount of Rs. 3.72 lakh crore was collected in last four months (two major instalments of advance corporate taxes are deposited in December and March). Position until November indicates normal growth in corporate tax (as September instalment was paid before the corporate tax cut was announced), which indicates a flat growth this year over last year’s collection. Assuming Rs. 50000 crore only would be the impact of corporate tax cut, this is likely to reduce the corporate tax collections to Rs. 3.22 crore between December to March. Thus, total CIT may be only around 6.10 lakh crore in 2019-20, a shortfall of about Rs. 1.5 lakh crore against budgeted target.

PERSONAL INCOME TAXES (PIT)

Budget proposals introduced avoidable complexities for small gains

Individuals, including HUFs, non-corporate sector comprising firms, Association of Persons (AoPs) and Body of Individuals (BoIs) and Charitable Entities are assessed under Personal Income Tax (PIT) provisions. The estimated tax receipts for BE 2019-20 from this heterogeneous group of individuals, non-corporate and charitable entities is Rs. 5.69 lakh crore.

A few proposals in the Union Budget 2019-20 presented on July 5, 2019 made the system, rates and structure of PIT unnecessarily complicated putting back the process of simplification and reasonable low taxation regime which has been ushered in last 25 years. 

Two proposals invited major criticism.

First, surcharge on income tax payable by assesses with taxable income of more than 2 crore to 5 crore and those with more than 5 crore taxable income was enhanced (to tax super rich). The personal income tax rates were simplified and rationalised in three slabs in 1990s. With introduction of the enhanced surcharges, there are now effectively eight (8) slabs in the PIT- Nil upto Rs.2.5 lakh, 5% for income from 2.5 lakh to 5 lakh, 20% for income from 5 lakh to 10 lakh, 30% for income between 10 lakh and 50 lakh, 33% (30% plus 10% surcharge) for income from 50 lakh to 1 crore, 34.5% (30% plus 15% surcharge) for income between Rs. 1 crore to 2 crore, 37.5% (30% plus 25% surcharge) for income between 2 crore to 5 crore and 41.1% (30% plus 37% surcharge) for income more than 5 crore. There is an additional Health and Education Cess chargeable at 4% of income tax payable plus surcharge.

Persons forming this broad group subjected to PIT rates is quite a heterogeneous group. Many AoPs and BoIs carry out manufacturing and services businesses which compete with Corporates. Very similar businesses- asset management for example- are carried out by Corporates and also by Trusts. The surcharge proposals created unequal playing field for corporate and non-corporate bodies carrying out same businesses. There was raucous uproar by asset management community especially the foreign portfolio managers. They also resorted to some sell off in the equity markets leading to markets going down. The Government rolled back enhanced surcharge on long and short-term capital gains effectively withdrawing super rich tax from the non-corporate entities dealing in financial markets.

Besides making the personal income tax structure unnecessarily complicated, use of surcharge mechanism to transform the rate structure of income taxes, is unfair to the States as the surcharges are not shared with the state government under Finance Commission recommended devolution system.

India’s lowest slab of tax (Rs. 2.5 lakh to Rs. 5 lakh) is too low considering even the average income levels in the economy. It also carries a nominal rate of tax of 5%. Recognising this, the Government had exempted all tax-payers having taxable income of less than Rs. 5 lakh from the income tax payable.

After the Government had brought down the rates of corporate tax materially to make India a competitive tax destination, the clamour gained momentum that the PIT rates should also be made lower, in line with the lower rates which were prevalent in the country not long ago.

The Government can and should use the opportunity of next budget to simplify, rationalise and reform the PIT rate structure. The surcharges and cesses should be abolished and a simple five rate tax structure should be introduced. A structure with no tax for taxable income less than 5 lakh, 5% from 5-10 lakhs, 15% from 10-25 lakhs, 25% from 25-50 lakhs and 35% for income more than 50 lakhs would be quite welcome to the tax-payers and revenue considerations would also not be affected too adversely.

Second, additional income tax of 20% was imposed on buy-back of shares by the listed companies. The argument offered for introducing this additional income tax- called Income Distribution Tax (IDT) on share buyback was that such buy-backs are undertaken to avoid payment of Dividend Distribution Tax (DDT) on the income/dividend transfer embodied in such buy-back. That argument is quite untenable. Assesses receiving buy-back amount were responsible for making income tax on the capital gains made on the shares so bought back. By introducing tax on buy-back at 20% of the difference between the buy-back amount paid minus what the company undertaking buyback received when such shares were issued. The incidence of tax payable on buyback has gone up both on account of the taxable amount becoming larger than the sum of taxable amount receivable by all the recipients and amount received by tax-exempt and low tax payers also being subjected to the high rate of 20%.

Very logical consequence of this imposition has been that buy-back activity has stopped in the country. A valuable instrument of protecting share valuation and also returning surplus cash has got virtually quashed. Some PSUs might undertake buy-back still but non-PSUs corporates are unlikely to do so.

It would be better if the IDT introduced on listed companies is withdrawn in the ensuing budget to restore this valuable and legitimate instrument to the Companies.

It is good time to junk Dividend Distribution Tax

Dividend Distribution Tax or DDT was introduced in the days of payment of dividends by posting physical cheques and when income accounting and income tax returns system was all manual. There was no way to make sure how much dividend an individual has received and whether he was paying income tax thereon. Life has come full circle today. All dividends are paid digitally today directly in the bank accounts of the shareholders. Each individual dividend payment can be tracked and if needed, be subjected to payment of a tax deducted at source.

DDT is a clumsy and unfair way to tax incomes received by investors in the form of dividend. Some people would argue that the DDT taxes an income which is already taxed. But, if we were to accept that the dividend received by the shareholders is a kind of return on the investment he made, there would be a case for paying tax on income so received. Ideally, every tax payer should pay tax on dividend income he or she received at the rate applicable to him/her. The company pays tax on income it earns and it should not be its responsibility to pay tax on income which the investor is earning.

Taking advantage of the advancement of technology, it is time the Government junks the DDT. Tax on income received today exempt in the hands of the recipient as the DDT has been paid thereon should be directly paid by the recipient through his/her return. To ensure that large dividend recipients are subjected to tax payment at the time of its distribution, the Government can subject all dividend payment beyond Rs. 10000 to a tax deduction at source (TDS) of 20%.

Simplification and Strengthening of Capital Gains Taxation should receive attention now

Capital gains, when realised, are income earned on deployment of the savings/capital in assets. Profits are income earned on the deployment of capital and enterprise in businesses. Salary, wages etc. are income earned deployment of labour, skills and intelligence in goods and services produced in businesses. Subjecting salaries and wages to income taxation and profits of the risk capital deployed in businesses to income taxation but not subjecting income arising from realisation of valuation gains in the assets is quite unfair. There is no rationale for exempting or providing a favourable treatment to capital gains.

Present system of taxation of capital gains is quite cluttered, unfair and inefficient. Different types of assets have different tax incidence. Physical assets (land/ building etc.) and financial assets (share, debt instruments etc.) are taxed differently. Short term and long-term capital gains are treated differently. Quite a few assets are subjected to an additional blunt tax called stamps and registration duty, where irrespective of whether you make any capital gains or not, you pay a hefty 5-10% tax on total consideration/ artificially assessed market value.

All assets should move to a single and capital gains taxation- 20% of the capital gains made on inflation adjusted purchase value- whether these are financial assets or physical assets. No other tax like stamp duty and no other exemptions- like reinvestment in similar assets etc. States should be persuaded/ incentivised to abolish stamp duties on sale of assets. For the States, which take some time in doing so, the stamp duty paid can be allowed to be reduced from the capital gains tax liability.

In view of this reform of capital gains taxation, all calls for abolishing the long-term capital gains (LTCG) tax on shares should be summarily rejected.  

Performance of Personal Income Tax in 2019-20

The personal income taxes collected in the first 8 months of current fiscal (until November 2019) is Rs. 2.68 lakh crore. An amount of Rs. 2.50 lakh crore was collected during the same period last year. Thus, PIT has had a growth rate of only 7.2%. The target growth rate this year is over 23% (Rs. 5.69 lakh crore over last year’s 4.62 lakh crore or additional expected amount of Rs. 1.07 lakh crore). An amount of Rs. 2.22 lakh crore was collected during the last four months for PIT. Growth rate of PIT was about 14% in last four months in 2018-19. Assuming growth of 15% in last four months, it is expected that an amount of Rs. 2.55 lakh crore may get collected in remaining four months. Adding this amount to revenue of Rs. 2.68 lakh crore already collected; it is expected that total PIT collections would be around Rs. 5.23 lakh crore against the budgeted estimates of Rs. 5.69 lakh crore, yielding a likely shortfall of Rs. 46000 crore.

GOODS AND SERVICES TAX (GST)

GST, the biggest indirect taxation reforms, is still a work in progress

GST rate(s) system has crucial bearing on not only the amount collected but also in its general acceptance and ease of doing business. India’s indirect tax system was bedevilled by several taxes with numerous rates and exemptions. GST was expected to be a good and simple tax. To get the revenue neutral rate (RNR; single rate at which collection of GST is expected to be equal to the collections under the indirect taxes collected by Centre and States, in same year under reference), Arvind Subramanian, then CEA, led Committee recommended RNR of 15-15.5% (to be levied by the Centre and the States combined). A lower rate of 12% was recommended for certain goods usually consumed by the poor and a sin or demerit rate of 405 to be applied to luxury cars, aerated beverages, pan masala and tobacco). GST Council, however, adopted four rate structure of GST- 5%, 12%, 18% and 28%- with some goods and services being placed under ‘exempt’ category. There are actually four more additional rates of .25%, 1% and 3% applicable for unworked diamonds and precious stones (.25%), affordable housing (1%) and precious metals (3%). A cess over the peak rate of 28% over specified luxury and demerit goods make for a few more effective applicable on higher side of GST rate structure as well. Exports are zero rated.

GST still remains a work in progress. Most imperative condition for a GST system to be seamlessly in place is filing of returns containing all invoices with details of all input supplies received and all output supplies made. As per original design of GST, three returns were to capture this information for each business. GSTR1 was to get details of all output supplies/sales, GSTR2 for all input supplies/ purchases received and GSTR3 an overview return with details of gross inputs, outputs and taxes payable and paid. Right in the beginning at the time of roll out of GST in 2017, the Government suspended GSTR2, which was to provide details of inputs received. GSTR3, which was to be virtually an auto-generated returns based on all inputs and outputs flowing from GSTR1 and GSTR2 was rendered ineffective and the Government allowed it to be filed on a self-declaration basis. The Industry had complained that GSTR1 andGSTR2 were not really easy as these were essentially conversion of manual forms into digital forms and were accordingly quite complex. The Government set out a process to simplify the forms and have redesigned the same. The new simplified forms named GST RET-1, GST ANX-1 and GST ANX-2 were to be introduced in July 2019. However, the Government again deferred these and announced that these would be mandated in a staggered manner from October 1, 2019 and the entire system would move to the new forms from January 1, 2020. GST council again deferred these on grounds of complications arising from introduction of new forms mid-year. These new forms are now scheduled to be implemented from April 1, 2020. Industry is still demanding two concessions. One, to introduce new forms in a staggered manner, even after April 1, 2020 and use of different HSN Codes for different kinds of businesses. HSN Code is a six-digit number, which capture Industry, business and product together.

Considerable business still remains outside the GST system

Besides the petroleum products, there are two categories of businesses which either remains out of the GST system or interacts with it in form and manner different than required under GST design. These are:

a.    There is an exemption from the obligation to register under GST and make GST payment if a supplier of service has aggregate turnover less than Rs. 20 lakh in a year. This is applicable to service provers through e-commerce or in the course of inter-state services. For goods, this minimum threshold has been raised to Rs. 40 lakhs with effect from 1^st April 2019. Businesses have option to obtain multiple registrations in a State if they have more than one place of business.

b.    Businesses with turnover less than 1.5 crore of goods or .5 crore of services are allowed to be assessed under a ‘composition scheme’. Tax rates applicable for ‘goods’ turnover is 1% to 5% and for ‘services’ turnover, it is 6%. Facility provided to small traders ((turnover less than Rs. 5 crore). These businesses can file quarterly returns. Two types of such traders (B2C or B2C+B2B) file their returns in simpler form (Sahaj and Sugam) quarterly.

Reverse charge mechanism is a method to get the sales reported on the GST system for those goods and services which are supplied by the businesses not required to be registered under GST or operating under composition scheme. However, reverse charge mechanism has got implemented only very marginally so far. Only goods and services purchased by specified promoters of projects notified under two notifications to the extent these constitute shortfall from the minimum value of goods/ services are currently required to be taxed on reverse charge mechanism.

Certain transactions have been subjected to Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) under the GST system. These provisions, with certain exemptions, have been implemented with effect from 1^st October 2018. The obligated persons for TDS, include government departments, local authorities and government agencies, who are recipients of supply, under a contract, which exceeds two lakh and fifty thousand rupees. TCS obligation is on e-commerce platform operators, who are required to collect tax at source at rates, which are below 2% of net value of taxable supplies, out of payments to suppliers supplying goods or services through their portals.

GST on real estate has also been going through changes. As decided in the GST Council meetings held on 24^th February and 19^th March 2019, GST rate was made 5% on residential properties, with affordable housing properties attracting only 1% GST. This was subject to certain conditions relating to percentage of inputs required to be purchased from registered dealers and GST at higher rates being payable on cement purchased from unregistered dealers and capital goods etc. This system of lower GST rates, without input tax credit, replaced original system of 8% GST rate or 12% without input rebate. Rates on electric automobiles were also tweaked on 27^th July meeting of GST Council by reducing applicable duty from 12% to 5% and also bringing down the GST applicable on charger or charging stations for electric vehicles from 18% to 5%.

Handling IGST and Compensation Cess

GST Council took some ad-hoc decisions to deal with the initial period of stabilization of GST. It has been decided that the IGST, not apportioned to the Centre or States/UTs, may be distributed to the Centre and the States/UTs 50% each. Likewise, surplus, if available in a year in the GST Compensation Fund be distributed to the Centre 50% and to the States/UTs 50%. In the first year of GST implementation, the Centre retained all 100% of IGST surplus in the Consolidated Fund of India, thereby treating this as the revenue of the Central Government and transferred 42% of this to the States as their share of devolution. Surplus available under the GST Compensation Fund was transferred to the Public Account in 2017-18. In 2018-19, not only the surplus of 2018-19 not transferred to the Public Account but the amount transferred in 2017-18 was also reversed and brought in the Consolidated Fund of India.

There is a complex system of cross utilization of input credits. IGST credit is allowed to be used for payment of all taxes- IGST, CGST and SGST. CGST credit can be used only for IGST or CGST. SGST credit can be availed only for paying SGST or IGST. There is also a sequencing or order of using the input credits. CGST input credit is allowed to be used for payment of CGST and IGST in that order. ITC of SGST is allowed for payment of SGST and IGST in that order and ITC of IGST is allowed for payment of IGST, CGST and SGST in that order. Further, the assesses have to use IGST credit balances first before utilization of CGST or SGST.

GST Compensation Cess became a matter of dispute and contention between the Centre and the States this year. GST Compensation Cess is levied on supply of certain goods and services as recommended by GST council, and on goods and services included in the Schedule of the GST Compensation Act (Coal, tobacco, motor cars etc.) to finance the compensation needed. As per the Constitutional provision and as provided in the Goods and Services Tax (Compensation to States) Act, 2017, the States will get compensation for a period of five years in case any State’s GST revenues falls short of 14% guaranteed increase over the base tax revenue (State VAT+ CST+ Entry Tax+ Octroi+ Local Body Tax+ Luxury Tax+ Advertisement Tax) in 2015-16. The Act further provides that all GST Cess collected will be credited to non-lapsable Fund- Goods and Services Tax Compensation Fund- in the Public Account of the Union of India. Amounts in the Fund remaining unutilized at the end of the transition period (i.e. after five years) will be shared between the Union (50%) and the States (in the ratio of SGST).

An amount of Rs. 62612 crore was collected as GST Cess in FY 2017-18. However, only Rs. 56146 crore was transferred to the GST Fund Account, leaving Rs. 6466 crore in the Consolidated Fund of GoI. An amount of Rs. 41146 crore was released in four instalments to the States as compensation (Rs. 10806, Rs. 13694, Rs. 3898 and Rs. 12749 for bi-monthly period beginning July 2017). This left a total of Rs. 21466 crore unutillised (Rs. 15000 crore in the Fund and Rs. 6466 crore not transferred to the Fund). During 2018-19, an amount of Rs. 95081 crore was collected as GST Cess (provisional numbers CGA). Only an amount of Rs. 69275 crore was transferred to the States for compensation. This year also, the GST Cess yielded a surplus of Rs. 25806 crore. The Central Government did not transfer any amount in the GST Fund this year. Instead, Rs. 15000 crore was re-transferred from the Fund (left unspent in the previous year) to the Consolidated Fund. Taken together, a surplus of Rs. 47272 crore of GST Compensation Cess was with the Central Government at the beginning of the FY 2019-20.

The year 2019-20 has been quite bad for the GST collections of the States. Consequently, the Government of India has been under pressure to release more Compensation Cess than what has been collected this year. The Government delayed the release of GST Compensation Cess for Aug-Sept and Oct-Nov period and finally relented on 15^th December to release Rs. 35,298 crore, drawing from the amounts retained during the year 2017-18 and 2018-19.

GST Council has authority to recommend cess on any goods and services chargeable to GST under the CGST Act.

No cess or surcharge can be levied on GST, other than GST compensation cess, as per the provisions. However, an exception was made when a 1% Cess on Intra-State supply of goods and services in the State of Kerala for a period not exceeding 2 years to raise resources for Kerala to meet additional expenditure requirement arising out of massive Kerala floods.

Inverted Duty Structure under GST

Inverted duty structure is presently in evidence in quite a few products. Mobile phones have GST of 12%, whereas batteries and phone parts have 18%. Fabric carries GST duty of 5% whereas Yarn has duty of 12%. Tractors suffer duty of 12%, whereas Parts have GST incidence of 18%. Desktops are charged 12% GST, whereas monitors, printers etc. have GST rate of 28%.

Fluctuating number of firms filing returns under GST

Decisions taken by the Government of India and the GST Council has had enormous influence on the number of GST taxpayers, who file, the regular assessment return GSTR-3B and also the supply return GSTR-1. GSTR-3B returns steadily increased from 65.92 lakh in July 2017 to reach maximum of 84.90 lakh in October 18 and steadied at around 84 lakhs every month until March 2019. Thereafter, on account of change in thresholds, GSTR-3B returns filed in April 2019 dropped to 81.40 lakh, to 80.14 lakhs in May 2019, and to 75.79 lakhs in June 2019. It continues to decline, with 73.83 GSTR-3B returns filed in October 2019. There is an important trend reversal in the month of November 2019, when 77.83 lakh GSTR-3B have been filed.

GSTR 1 returns have seen surprising low in June 2019 with only 50.79 such returns being filed. GSTR-1 returns peaked in September 2018 at 76.91 lakh. These returns started declining from March 2019, when the number fell to 70.19 lakh. 

Performance of GST revenues

Government informed Parliament on 9/12 that actual CGST collections stood at Rs. 3.28 lakh crore as against the annual target of 5.26 lakh crore. This provides a monthly average of Rs. 41000 crore as opposed to required Rs. 43833 crore. In 2018-19, actual CGST collections stood at Rs. 4.57 lakh crore against the estimates of 6.03 lakh crore.

Overall GST revenues (IGST, CGST, SGST and Compensation Cess combined) touched 1 lakh crore mark for the first time in April 18, when total GST revenue received was Rs. 1.03 lakh crore. FY 2018-19 saw GST revenues exceeding a lakh crore on four occasions (March 18, October 18, January 19 and March 19). Financial Year 2019-29 began very well with total GST revenues coming at the highest at Rs. 1.14 lakh crore in April, 19. It was close to exceeding a lakh crore every month until July 2019. Total GST revenues declined to less than rupees one lakh crore for three months continuously when it was Rs. 98202 crore (August), Rs. 91916 crore (September) and Rs. 95380 crore (October). GST revenues collected in September and October 2019 was lower than the GST revenues collected during these two months in 2018. However, November reversed the trend with Rs. 103492 crore collected as against Rs. 97637 crore collected in November 2018.

Total collection under the CGST, IGST (net of transfers) and Compensation Cess are Rs. 3.26 lakh crore until October 2019 as against the budgeted target of Rs. 6.63 lakh crore. The position of total collections under GST until end December are not available.  

Information provided by Controller General of Accounts (CGA) indicates that amounts of Rs. 3.28 lakh crore was collected under CGST (last year 2.97 lakh crore), UT GST of Rs. 1696 crore (last year 1007 crore), IGST of Rs. 5992 crore (last year 22011 crore) and CST Compensation Cess of Rs. 62586 crore (last year 62598 crore) have been collected under GST this fiscal year until November 2019. In all, an amount of Rs. 3.99 lakh crore has been collected under the four heads of GST under Central Government budget 2019-20. This shows a growth of only 4.11% over last year collections (3.83 lakh crore). The target growth rate is 13.53%.

Last year an amount of Rs. 2.01 lakh crore was collected under the GST heads available to the Central Government in last four months. We may assume a growth rate of 7.5% over last year’s collection (in 8 months, growth rate has been only 4.11%). This will yield an amount of about Rs. 2.16 lakh crore, giving the 2019-20 collections of Rs. 6.15 lakh crore.

Therefore, the GST revenues are likely to fall short by about Rs. 50000 crore this year.

Bringing Petroleum Products in GST system

There is no good reason to keep petroleum products out of the GST except the intention to protect excessively high revenues which the Centre and the States get out of the VAT/Excise/Cesses collected from sale of petroleum products. It is time to consider bringing petroleum products under the GST system. Their integration can be designed in such a manner, with use of excise duties, that the existing overall revenues are protected for a finite number of years. Sharing arrangements can also be so decided that the States do not lose revenues at aggregate level.

Excise Revenues

Excise duties has a steep budgeted target of Rs. 3 lakh crore. The Government (as per details released by CGA) has collected only Rs. 1.33 lakh crore under union excise duties as against Rs. 1.38 lakh crore collected during the same period last year. Thus, there is negative growth of 3.8% thus far in the current year. The Government had collected Rs. 92875 crore last fiscal during the period December-March, which was 40% of the yearly collection. There is not much likelihood that the excise collection situation would improve any better than last year, therefore it is quite likely that about 40% of collections only would accrue in last four months this year as well. This gives estimated receipts of about Rs. 2.20 lakh crore for the year 2019-20. It seems the Government is staring at a major shortfall of Rs. 70-80000 crore under excise this year.

Customs Duty

Estimated receipts under Customs are Rs. 1.56 lakh crore (a growth rate of 32%) in the FY 2019-20.

Performance of tax collections have been quite pathetic so far; only an amount of Rs. 75933 crore has been collected until November 2019. The collections until November are 10,855 crore less than the collections of Rs. 86788 crore during the same period last year, a negative growth of 12.51%, the highest for any tax this year. Only an amount of Rs. 31,142 crore was collected under customs duty in last four months last year. Even if we assume that the negative growth would be reversed (very difficult considering that imports have declining in December as well at a high rate of 8.83%) and the Government would be able to collect about Rs. 30000 crore in last four months, total collections under customs would be only around 1.06 lakh crore, a shortfall of about Rs. 50000 crore.

OVERALL TAX COLLECTION SCENARIO

The Government seems to be staring at shortage in tax collections against all the five major direct and indirect taxes. Corporate Tax are likely to see a shortfall of Rs. 150000 crore, Personal Income Tax a shortfall of Rs. 46000 crore, GST another Rs. 50000 crore, Excise a shortfall of Rs. 70000-80000 crore and Customs a shortfall of Rs. 50000 crore. All the five taxes together, might see a combined shortfall of Rs. 350000-375000 crore.

States receive about 32% of the total collections effectively. Therefore, the Centre might reduce the transfer of central taxes to the States by about Rs. 112000-120000 crore.

This indicates that net effect on the Central Government revenues would be to the tune of Rs. 238000 crore to Rs. 255000 crore. Rounding it off to Rs. 250000 crore, this shortfall would amount to, in terms of GDP, to 1.2% of GDP.

CONCLUSION

Looked at from tax revenues perspective, 2019-20 is proving to be a dysfunctional year. The Government had budgeted gross tax revenues of the Centre at Rs. 24.59 lakh crore. Setting aside Rs. 8.09 lakh crore as the share of the States, the budgeted net tax revenues to the Centre was kept at Rs. 16.50 lakh crore. This was 3.13 lakh crore higher than the provisional/actual net tax revenues of Rs. 13.37 lakh crore collected in 2018-19, an increase of 23.4%. Indeed, it was quite a steep target.

Severe slowdown in the economic growth complicated the matters further. GDP for the year 2018-19 is projected to grow at only 5% in constant terms and 7.5% in nominal terms. With income and consumption growth both seeing a kind of slump, the impact on tax collection was bound to be more severe. This is reflected in the taxes collected so far and the likely tax revenue collections in remaining months of this year.

Corporate Tax, Excise Duties and Customs are likely to see negative growth in collections this year- something of the order of 8% in Corporate Taxes (Rs. 6.1 crore against Rs. 6.64 crore), about 5% negative growth in Excise Duties (Rs. 2.2 lakh crore against Rs. 2.31 lakh crore) and about 10% lower collection in Customs Duty (Rs. 1.06 lakh crore against Rs. 1.18 lakh crore). Personal Income Taxes (PIT) and Goods and Services Taxes (GST) are likely to see very small positive growth over last year’s actual collections. PIT are expected to grow by about 13% (a little optimistic: Rs. 5.23 lakh crore against Rs. 4.62 lakh crore collected last year). GST revenues are expected to grow by about 3% (Rs. 6.15 lakh crore as against Rs. 5.84 crore last year).

Overall, there is likely to be shortfall of Rs. 3.5 to 3.75 lakh crore in gross tax collections of the Centre. Expecting that the Centre could revise transfers to the States out of the Centre taxes (about 32% of shortfall), the net taxes to the Centre are likely to be short by Rs. 2.5 lakh crore or 1.2% of GDP.

This is quite a steep shortfall in collections, unlikely to be bridged by either higher accrual under the non-tax revenues or expenditure compression. Therefore, revision of fiscal deficit goal of 3.3% by .5% to .7% appears quite inevitable.

Corporate Tax structure has been made reasonable and competitive during the current year. No more action is expected in this regard. There are quite a few major tax reforms, which need to be undertaken in the taxation structure of Personal Income Taxes.

Personal Income Taxes have got deformed over the years. There are as many as eight slabs of income tax with the highest effective tax rate exceeding 40%. The rate structure should be reformed.  A rate structure with no tax for taxable income less than 5 lakh, 5% on income from 5-10 lakhs, 15% on income from 10-25 lakhs, 25% on income from 25-50 lakhs and 35% on income more than 50 lakhs would be quite a simple and fairer structure. As there would be no cesses and surcharges, such a structure would be welcomed by the tax-payers. The states would also find this system a non-distortionary and their complaints of Centre gaining at their expense would also be over. The revenue considerations would also not be affected too adversely.

It is high time, taking advantage of the digital banking and record keeping, to abolish the Dividend Distribution Tax (DDT). Assesses will get taxed for the dividend income at the rates applicable to them. A provision of tax deduction at source (TDS) can also be introduced for dividend distribution of over Rs. 10000 to a person by a Company at the rate of 20%.

The capital gains taxation should now receive policy attention for reform. The long-term capital gains should continue to be taxed and be streamlined only as part of the larger reforms in capital gains taxation.

GST is still work in progress. Utmost attention requires to be given to complete the invoice uploading and matching process and other needed process reforms.

While the underlying tax revenue situation is grim, it is the right time to initiate much needed reforms in the taxation structure.

SUBHASH CHANDRA GARG

NEW DELHI 19/01/2020