Managing government finances in India is becoming increasingly difficult with lower revenue collection and higher spending commitments. If corrective measures are not taken immediately, it would continue to affect economic growth. On the revenue side, the inadequacy of the tax administration, particularly in the context of the goods and services tax (GST), is severely affecting collections. As a recent report of the Comptroller and Auditor General of India (CAG) showed, the GST, which is rightly seen as one of the biggest reforms in recent history, is not working as desired, and some of the implementation issues remain unaddressed. For instance, as the CAG noted, even two years after the roll-out, system-validated input tax credit by invoice matching is still not in place.
Predictably, the inadequacies of the system have had a direct impact on revenue collection. For example, growth in indirect tax collection fell to 5.8 per cent in 2017-18, compared to a growth rate of over 20 per cent in the previous year. The estimated collection was revised lower even for the last fiscal year. Also, the insufficiency of the system has not allowed the appropriate settlement of the integrated GST (IGST). Therefore, instead of lowering GST rates randomly, the GST Council would do well to work on improving the system.
The government’s auditor has also highlighted some structural issues in the direct tax administration. While collection and compliance have increased, there is again a need to improve the administration. For instance, the arrears of demand at the end of 2017-18 were in excess of Rs 11 trillion, and the tax department thinks that over 98 per cent of this would be difficult to recover. Further, there are plenty of tax cases stuck in different courts. Clearly, there is a case for simplifying tax rules, which will help reduce litigation and improve collection. Hopefully, the task force working on the new direct tax code will recommend ways to reduce litigation.
Therefore, aside from the government’s expenditure commitments, subdued revenue collection is affecting the fiscal balance. According to the calculations made by the CAG and presented before the Fifteenth Finance Commission, the fiscal deficit of the Centre in 2017-18 was 5.85 per cent of gross domestic product and not 3.46 per cent as shown by the government. This basically includes borrowing by public sector undertakings to cover government expenditure.
At a broader level, what this means is that the central government, central public sector undertakings, and state governments are using the entire pool of household financial savings. This also explains the overall approach of increasing borrowing from abroad, both at the government and corporate levels, which has its inherent risks.
The government should work on addressing the issues raised by the CAG on the tax administration, especially the GST system, and reassess its expenditure. Though it is correct that rationalising expenditure would be difficult during a slowdown, reservations about Budget numbers and an unsustainable level of public sector borrowing can be more damaging in the medium term. If necessary steps are not taken in time, a course correction would become increasingly more painful.
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