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Starting in mid-March, companies were backing down when a devastating virus launched a web of disease and fear across India. Any formal activity that required people to be in some degree of proximity began to close. And, on March 25, everything stopped. As a concession, the government allowed companies a grace period to file their GST statements, which partly explains this latter decrease.
However, not everything can be fixed in the coronavirus. There were signs of a decline even earlier. GST collections for economic activity in February, not a month affected by a pandemic, were the lowest in five months (figure 1).
Looking ahead, April has been a disaster, and collections are expected to be even lower than March. Indicatively, the number of invoices issued electronically, which are necessary to move shipments of a higher value ₹50,000: It has decreased from approximately 57.2 million in February to 6.7 million in April. That is about 10% of normal volumes.
As the country gradually reopens, a return to business as usual is unlikely to be rapid. The prognosis is bleak. GST, a key revenue generation tool, weakens considerably. This will have a ripple effect in the states, which, on average, depend on the Center for about half of their income. This weakening comes at a time when governments have no choice but to undertake large expenditures, partly to alleviate suffering and partly to get the wheels moving again.
Even before this turmoil, the government was grappling with the GST, a tax system that India switched to in July 2017 after changing the old one. But much of the pain was on the side of taxpayers, who have had to deal with more requests and cash management issues, in addition to delays in refunds. This new crisis of collections and trust has opened a new front for the government in its GST battle.
Central riddle
This has implications for two constituencies: the Center and the states. In the 2020-21 Budget, the Center projected gross tax revenue (before a share is shared with the states) in ₹24.2 billion. Of this, the GST collections were screened at ₹6.9 billion, or 29%.
This was seen by most experts as ambitious as the government has consistently been lacking estimates. For 2019-20, the intermediate numbers published in February show a deficit of 8%. Statewide, according to a research report from the State Bank of India, 13 of the 19 prominent states recorded single-digit growth in GST collections even last year (Chart 2). “For fiscal year 21, states expect growth of around 17%. Given the difficult economic conditions, these numbers could be in the single digits, “added the OSE report, published when the pandemic was in its early days in India.
A drop in GST collections will trigger a number of problems. The Center has committed to spending more to weather covid-19. On March 26, he announced an aid package, the amount of which was put into ₹1.7 billion. The Center should provide more in the coming months. Although not all measures will result in financial expense, you are still considering substantial expenses that you had not planned or budgeted for.
Despite spending more, the Center is looking at lower income. It’s not just about GST charges, a consumption tax. With the impact of economic activity, each head of tax will suffer a beating (graph 3).
State riddle
States are in a similar position: They have to spend more on the one hand and deal with less income on the other. Part of his dilemma flows through the Center. Decade ₹100 that the Center collects as taxes, distributes ₹42 a states based on a certain formula. If tax collections fall, the Center will have less to share with the states.
In this mix comes GST. The GST was a core initiative, with the thought that a single, uniform indirect tax system was better than a large number of taxes whose rates varied from state to state. For states to join, the Center assured them 14% annual revenue growth in the first five years of GST.
With the economy forgoing low to negative growth this year, this 14% growth will not materialize organically. Nor will it materialize inorganically, with the Center facing a cash crisis. The Center has a fund, called “cessation of compensation,” to cover these deficits, but has not been quick on payments, much to the chagrin of the states.
Still, these are all firefighting measures to overcome the current crisis. In the medium and long term, for any significant change, both the Center and the states need solid GST payments from taxpayers: businesses, merchants, retailers, and professionals.
Compliance cost
Before the entire conversation turned to covid-19, this class of taxpayers was struggling to cope in other ways with the three-year GST system.
One, with GST, the basic periodicity of refund requests went from quarterly to monthly, and lowered the threshold for who has to file returns. This places greater demands on taxpayers’ cash flows. The GST system, like the previous system, is an invoice-based system. GST must be paid in the period an invoice is generated, not when the payment is made.
Therefore, for invoices collected in January, a company that pays GST monthly must pay taxes by February 20. On average, payments take 1 to 3 months to complete. Then, this firm will receive payments for its January bills, on which it paid taxes before February 20, between February and April. This requires good cash flow management. Before GST, the same companies filed quarterly returns, giving them more room to close the payment cycle.
Two, monthly returns mean that companies have to file more returns. Before GST, a retailer filed 5 indirect tax returns in one year. Now, under GST, any entity with an annual turnover greater than ₹Rs 1.5 million have to file 25 returns in one year. There are two monthly statements, GSTR-1 (sales details) and GSTR-3B (summary of sales, purchases and entry tax credit), and one annual statement, GSTR-9 (see Table 4).
The GST infrastructure has been struggling to handle a large number of concurrent requests. Even without technical problems, there have been delays. As of December 31, 2019, only 65% of taxpayers who were supposed to file GSTR-1 had filed by September 2019.
With the covid-19 limbo, these delay numbers could increase dramatically. During this blockade, the government has relaxed the payment dates. Therefore, for taxpayers with an annual turnover of up to ₹Rs 5 million, the due dates for filing GSTR-3B for February, March and April have been extended to the last week of June.
Entry credit problems
Taxpayers cite several reasons for delays in filing returns. In addition to technical issues, there are issues related to applying for entry credit. The GST collection figure released by the central government each month is approximately ₹1 trillion. These are gross collections, and various reconciliations take place.
One is the GST status portion. The second is something called an “entry credit,” where taxpayers can offset the GST paid by them against the GST they must pay. Take the example of a design company that bills a customer, for example, ₹10 lakh. In the monthly GST cycle in which you raise this invoice, you will pay 18% GST ( ₹1.8 lakh) to the government. Let’s say that same month you bought a computer ₹1 lakh in which GST paid ( ₹18,000). It can be deduced that ₹18,000 GST paid from your ₹1.8 lakh payable by quoting the GST number of the computer vendor and the purchase invoice number. The logic: the computer is an “gateway” to the service provided by the design firm, and only the final product should be taxable.
But if the computer vendor does not pay GST on time or its return has an error, the design firm will not be able to claim this ₹18,000 credit. Experts say that the errors in the matching invoices are responsible for the stagnation of the submissions or a less credited amount in 70-80% of the cases. This process of matching invoice numbers is not yet automated.
Exporter problems
Under GST, another pairing problem comes with the goods being exported, something that has increased the need for working capital for exporters. In line with world standards, exporters are not required to pay taxes in India, as the importing country will charge them. In such cases, the tax paid on input purchases by an exporter will be refunded by the government when the shipment leaves India.
However, this does not happen as precisely. The effort to match invoices results in delays and variations in claims. According to a Rajya Sabha question, in 2019-20, as of September 1, 2019, exporters had submitted around 585,000 applications, claiming refunds of ₹1.15 billion. Only about 56% of the requests had been fully processed.
The income tax department also has to deal with the issue of false invoices to claim a tax credit. For the central government, these points of friction, contention, and fraud add to their current fiscal headache: how to raise more revenue. In the short, medium and long term, GST collections must recover dramatically. Or India’s pandemic response will soon reach a point where money has simply run out.
Rangoli Agrawal works with howindialives.com, which is a public data search engine and database.
