CGST shortfall may force govt to cut spending to meet fiscal deficit target

Despite crossing the Rs 1-trillion mark twice this year, the goods and services tax (GST) collections are running well behind the budgeted target. As opposed to a monthly target of Rs 1.04 trillion, the monthly run rate adjusting for refunds, works out to around Rs 89,600 crore according to a report by Kotak Institutional Equities.

While the report pegs the Centre’s GST shortfall at Rs 1 trillion, adjusting for tax devolution to states, the Centre is possibly staring at a shortfall of Rs 58,000 crore.

Part of the gap may be plugged by higher than expected direct tax collections, though meeting the disinvestment target might be difficult, say analysts Business Standard spoke to.

This could force the government to either cut its capital expenditure this year or roll over spending on account of subsidies to next year in order to meet the fiscal deficit target.

But, even this may not be enough. Economists at Kotak Institutional Equities and Ind-Ra expect the Centre’s fiscal deficit to touch 3.5 per cent of GDP, as against the budgeted target of 3.3 per cent in 2018-19. The fiscal deficit has already crossed the budget estimates by 15 per cent in November.

At the aggregate level, total GST collections for 2018-19 were pegged at Rs 12.51 trillion, implying a monthly run rate of Rs 1.04 trillion.

However, the monthly run rate in the first nine months of the current fiscal year has been lower at around Rs 96,800 crores. Adjusting for refunds, the nine-month average works out to around Rs 89,600 crore, a Kotak Institutional Equities report said.

This shortfall implies that collections have to touch Rs 1.5 trillion each month for the remaining three months to meet the aggregate budget target.

In its budget 2018-19, the Centre has pegged central GST (CGST) collections at Rs 6.03 trillion, while unallocated integrated GST (IGST) adding up to Rs 50,000 crore was expected to remain in its books at the end of 2018-19.

Now, data from the controller general of accounts (CGA) and the finance ministry shows that total CGST collections till December have touched Rs 3.4 trillion. This means the Centre has three months to touch the Rs 6-trillion target.

While monthly CGST collections (excluding the amount allocated from IGST) have averaged Rs 16,300 crores so far, the Centre could reduce its shortfall through two ways.

First, it could distribute the unallocated portion of the compensation cess equally between itself and the states. Second, it could also allocate a higher proportion of IGST to itself rather than splitting it equally with states in the remaining months. On the compensation cess, in 2017-18, while Rs 62,596 crore was mopped up through the compensation cess, Rs 48,178 crores was distributed to states, leaving a saving of Rs 14,418 crore.

So far this year, as against a collection target of Rs 90,000 crores, the Centre has distributed Rs 30,751 crore (till September), as compensation.

With analysts expecting the Centre to release about Rs 30,000 crore as compensation in the remaining months of this fiscal year, it implies that about Rs 45,000 crore of unallocated compensation cess can be distributed equally between the Centre and states, plugging part of the shortfall.

However, even if one was to assume a higher integrated GST (IGST) allocation to the Centre and the distribution of unallocated compensation cess between the Centre and states, the Centre’s shortfall is expected to be around Rs 1 trillion, estimates Kotak Institutional Equities.

But as 42 per cent of tax collections are to be devolved to states, the Centre’s net shortfall works out to about Rs 58,000 crores. The centre will not compensate states for any shortfall in budgeted tax devolution. 

Part of the shortfall could be plugged through higher direct tax revenues. Direct taxes, including corporate and personal income taxes, grew at a robust 16.5 per cent (April to November), higher than the budgeted growth target of 14.4 per cent. Further, higher than expected customs revenues may also help plug the gap.

But, concerns also linger on the Cent­re’s ability to meet its disinvestment target, despite proceeds more than doubling to Rs 34,000 crores as of December 27, 2018, up from Rs 15,800 crore in November-end.

“Although potential buybacks by some PSUs, and purchase of the GoI’s stake in certain entities by other PSUs may help shore up disinvestment proceeds, some concerns linger over the likelihood of achievement of the full-year target of disinvestment of Rs 80,000 crore,” said Aditi Nayar, principal economist at Icra.

To meet the fiscal deficit target, the Centre could cut back on capital expenditure. Capex has already contracted in the last three months. In November alone it contracted 33 per cent. Further, the government could also roll over its subsidy expenditure.

“A considerable 93 per cent of the FY2019 budget estimate for fuel subsidies has been released in April-November FY19. Notwithstanding the recent pullback in crude prices and the rupee value against dollar, the outgo for major subsidies may overshoot the FY2019 BE, exerting upward pressure on the overall revenue expenditure for the ongoing fiscal, unless a portion of the subsidies due for the current year are rolled over to the next fiscal,” Nayar added.