GST revenue conceals more than it reveals

Data on GST revenue is now available from several official sources. An examination of these numbers raises three concerns. These relate to recognition of revenue, reporting of revenue and allocation of revenue. We focus only on the revenues from the IGST and Compensation cess for the year 2017-18.

Recognition of revenue

Article 269A of the Constitution, specifies that the state share of the IGST together with the CGST paid set off against IGST payable shall not form part of the Consolidated Fund of India(CFI) . Further IGST revenues are to be allocated between the Centre and the states complying with the IGST Act, the IGST rules and the GST (Settlement of Funds) Rules. All outstanding refunds and input tax credit claims must be fully settled or earmarked. The balance comprises IGST paid on interstate sales to consumers, unregistered and composition dealers, ineligible supplies and time barred claims. IGST tax credits cannot be claimed in respect of these categories, so this represents the true IGST revenue.

The outstanding balance in the IGST account includes pending refund claims and unadjusted amounts due to dealers. This cannot be considered as revenue. What percentage of IGST collections represents such commitments? It is difficult to estimate, but three points need consideration. One, IGST on exports and imports yields more than 50 per cent of aggregate IGST collections. Both will have to be refunded, the former immediately on export and the latter to the extent the imported goods are exported after passing through the manufacturing cycle. Two, IGST has also to be refunded on returns from interstate branch transfers and consignment sales, regular interstate sales returns, deemed exports, refund of accumulated credit due to inverted duty structure, year-end or volume-based incentives and refund to tourists and embassies. Three, there is an unknown amount of refund claims pending. In February 2018, the erstwhile Central Board of Excise and Customs (CBEC) reportedly admitted that 70 per cent of its refund claims were stuck. It can thus be argued that ~1,76,688 crore recognised as IGST revenue in 2017-18 includes the above mentioned commitments and needs to be excluded. Even after the true IGST revenue is arrived at, half of it belongs to the states.

The Compensation Cess Act requires that the proceeds of the cess shall be credited to a non-lapsable Fund known as the Goods and Services Tax Compensation Fund (Fund), which shall form part of the public account of India. For 2017-18, the Budget documents show revenue of ~62,612 crore as compensation cess. Of this, only ~56,146 crore was transferred to the Fund. What should be recognised as cess revenue for the Government of India(GoI)? Legally nil, as the entire collections should be kept in the Fund in the public account. At best the ~6,466 crore which was retained by the GoI in CFI.

Reporting of revenues

Of the ~1,76,688 crore IGST collection reported for 2017-18, ~35,000 crore was equally shared between the Centre and the states as ad hoc IGST settlement in February 2018. Since ~17,500 crore was disbursed to states in February 2018, the net IGST can be only ~1,59,188 crore, if the issues raised earlier are ignored.

Regarding the compensation cess, an amount of ~41,146 crore was paid to the states during the year. The net collections after deducting this amount was ~21,450 crore. This figure finds no place in the Budget documents which shows the gross revenue of ~62,612 crore.

Allocation of GST revenue

The GST (Settlement of Funds) Rules was amended in February and June 2018 empowering the GoI to “provisionally settle any sum of IGST which has not been settled so far” which is to be adjusted subsequently. On this basis, a sum of ~30,000 crore and ~1,76,688 crore was shared between the states and the Centre in the early 2018. The state’s share of ~15,000 crore was distributed amongst states based upon their revenue in 2015-16. The ~1,76,688 crore amount was taken into the CFI and settled as per 14 FC award. There are two problems with this. First, there is no whisper of “provisional settlement” in the IGST Act. The amendment to the rules providing for such provisional settlement can thus be seen as exceeding the delegation authorised in the Act. Secondly, the Act provides for distribution of IGST revenue amongst states on the basis of sales made in the state of consumption. The use of the 2015-16 revenue and the 14 FC award appears inconsistent with the law.

The compensation cess paid by a dealer is not eligible to be set off as input tax credit. This leads to tax cascading and inefficiency. For this reason, the Act clearly specifies that the collections should be utilised exclusively for providing compensation. The spirit of the Act is that cess rates should be adjusted periodically so that collections are calibrated to meet only the need of the states. Militating against this, the Compensation Cess Act was amended in August 2018 to allow for distribution of “unutilised” balances in the Fund equally between the Centre and the states at any time. The share of states is to be distributed on the basis of 201516 revenues. There are three problems here. One, the amendment changes the spirit of the Act. It is now seen as a source of revenue. Two, it is not clear why the GoI should share the revenue in a Fund constituted solely to address revenue losses of states. Three, if at all “excess” compensation cess is to be distributed as revenue amongst states, it should be based on need rather than history. However, this distribution process has not yet been activated. Of the ~90,000 crore estimated to be collected as cess in 2018-19 (RE), the GoI proposes to retain ~38,265 crore in the CFI and distribute the balance as compensation to the states.

It can be argued that the GoI is utilising the IGST and Compensation Cess Fund Accounts simultaneously as a source of revenue and as a source of ways and means financing. This approach sets up perverse incentives to delay IGST refunds and Compensation Fund payments. The former significantly emasculates exporters, manufacturers and traders, with downstream consequences. The latter debilitates the fiscal position of state governments. Both are undesirable. The GST Council needs to address these issues urgently.