The rates can always be revisited a year or two down the line, after growth stabilises and starts ticking up.
The October GST collections were encouraging, having risen 6% year-on-year (y-o-y) to Rs 1.03 lakh crore, albeit on a soft base and in a very festive month; collections in August-September were very weak, and fell 4% y-o-y. On a cash-accounting basis, October GST collections are estimated at just Rs 95,000 crore, implying an FY20 run-rate, so far, of around Rs 90,100 crore. That, then, pushes up the asking rate for the rest of FY20 to Rs 1.4 lakh crore per month. At the current run rate, there could be a shortfall of Rs 52,000 crore in CGST + IGST, and Rs 1.2 lakh crore in SGST collections.
It is clearly crunch time. Not only is government staring at a shortfall in GST and direct tax collections, the compensation cess deficit in 2019-20 could be, by one estimate, as high as Rs 63,200 crore. The monthly run-rate for cess collections—used to ensure state-government revenues continue to rise by 14% a year—is currently around Rs 43,300 crore while the required rate is Rs 55,900 crore. That is worrying because it means the states may not have enough to spend at a time when they need to. Even otherwise, the slow nominal rate of GDP growth—just 6.1% y-o-y in Q2FY20—would hurt tax buoyancy.
Given this, it is natural to ask for a hike in GST rates and/or a reduction in the exempted goods and services. But, as ex-CEA Arvind Subramanian argues, the poor performance has to be seen in the context of a rapidly slowing economy. For April- October 2019, the total collections—including CGST, IGST, SGST, and compensation cess—were Rs 7.02 lakh crore, and grew 3.4% year-on-year. That isn’t so bad given GDP growth has decelerated for six consecutive quarters and the 4.5% in Q2FY20 is a six-year low. Indeed, the government had budgeted for an 11% nominal GDP growth in FY20, but as of now, it would seem the final number will be closer to 6-7%. Keep in mind that corporate taxes grew 0.8% in April-October, and personal income taxes at just 6.7%.
Also, it must be appreciated that the levies themselves have been reduced across almost 500 goods and services; in two-and-a-half years and across 19 meetings, GST rates have been tweaked some three dozen times. The weighted average effective GST rate has fallen from 14.4% in July 2017 to 11.6% in September. So, while the collections seem below expectations, raising rates or cutting exemptions is probably not a good idea when consumption demand is so weak.
The rates can always be revisited a year or two down the line, after growth stabilises and starts ticking up. Having one rate may not be politically feasible, but certainly the five slabs can be pared to three first, and maybe to two later.
Source- Financial Express.