Govt staring at a shortfall of Rs 500 bn to Rs 1 trn in GST collection?

Can this be made up in other ways so as to not breach the fiscal deficit target?

The Narendra Modi government could be staring at a shortfall in Goods and Service Tax (GST) collection of anywhere between Rs 500 billion and Rs 1 trillion this fiscal, according to estimates put out by analysts over the last month.

Any potential shortfall in GST revenues – a prospect that the Centre has tried to ignore – will have an impact on government spending, which in turns has implications for India’s economic growth.

A report put out by the State Bank of India’s research wing this week expects a shortfall of “around Rs 900 billion in GST and excise collections”.

Out of this, Rs 105 billion is on account of recent reduction in petrol taxes.

The SBI report reckons that it could result in a federal spending cut of nearly Rs 700 billion, or one-fourth of projected capital expenditure for 2018-2019. This, it notes, would be twice the Rs 360 billion cut in capital spending that the Centre carried out in 2017-2018 in order to make sure the fiscal deficit didn’t cross 3.5% of gross domestic product.

Group chief economic adviser Soumya Kanti Ghosh notes that when combined with a slowdown in global growth, we could see a substantial negative impact on India’s GDP growth, with fourth quarter growth possibly going below 7%.

CLSA estimate

In a note to its clients this week, global brokerage CLSA says the GST deficit could be as high as Rs 1 trillion.

CLSA points out that from January to August 2018, GST collections were 13% below the budgeted Rs 1.12 trillion per month average. And that if this trend continues, there could be a shortfall of well over Rs 1 trillion for the fiscal year as a whole.

But are things getting better? There are some positive signals. In October 2018, revenue collections from GST stood at a decent Rs 1.01 trillion. This was the second month since the GST regime started that collections shot past the Rs 1 trillion mark.

Tax experts, however, point out that if one looks at historical indirect tax collections, October is a seasonally strong month, as it coincides with increased business activity ahead of the festival season.

The Modi government had last fiscal estimated revenues from GST to be pegged at over Rs 4.44 trillion, while for the current fiscal it is expected to be Rs 7.43 trillion.

In a separate analysis based on data obtained through Right to Information (RTI) requests, Business Standard noted earlier this year that the Centre’s collections from the central GST was Rs 500 billion at the end of the first quarter of 2018-2019.

And that it got another Rs 420 billin as settlement from the integrated GST over the same period.

“Assuming that tax collections grow at 10%(quarter-on-quarter, or QoQ), the Centre’s GST collection is likely to be Rs 517 billion less than the budgeted target of Rs 6,039 billion in an optimistic scenario,” the report noted.

What can the government do?

Generally speaking, a shortfall in revenue collections can be balanced out in three different ways.

First, the Centre can try to raise revenue through other non-tax options: disinvestment of public sector firms and so on. But, as The Wire has pointed out, the Modi government has only been able to put up divestment figures by forcing other public sector firms to buy out its stake in various entities. This method will not help the Centre achieve its target of Rs 800 billion for FY’19, out of which only Rs 150 billion has been achieved so far.

Second, the government could try to cobble together the GST shortfall by hoping for better-than-expected direct tax collections or a larger dividend from the Reserve Bank of India. Both of these don’t seem likely, although the Modi government’s demand for a greater portion of the central bank’s contingency reserves now does make more sense.

Finally, the Centre could simply breach its fiscal deficit target. For an administration focused on righting the UPA government’s wrongs, this would be embarrassing but not a disaster.