That the central government’s fiscal deficit touched 112% of the full year’s budget by November has raised a lot of concerns—particularly in the bonds market. Headline numbers suggest that the slippage is primarily on account of sluggish non-tax revenue and faster spending; and that the performance of tax revenue is almost on par with the previous year. However, when one digs deeper into the numbers of indirect tax revenue, potential cracks start emerging on that front too.
The introduction of the goods and services tax (GST) since July 2017 appears to have created some noise in the fiscal statistics. Connecting dots from the non-standard monthly reporting of GST collection figures by the Union finance ministry with the monthly fiscal statistics being reported by the Controller General of Accounts (CGA) is proving to be a herculean task for analysts. But when one attempts to do so, there arises a strong suspicion that the CGA figures in the post-GST months could be overstating the centre’s revenue.
During the first four months of GST (i.e. for the period of July-October—GST for which was collected from August-November), overall GST collections were around Rs3.6 trillion, as per finance ministry releases. The amount of GST collections that is reflecting in the centre’s gross tax revenue, as per the CGA’s data, works out to more than 70% of these countrywide collections. Going by the design of GST, the centre’s final share in total GST collections, i.e. the share after all IGST (Integrated GST) revenue is reconciled and credited to either the centre or the states, should not be significantly higher than 50%. In fact, one could argue that the centre’s real share in GST collections during these initial months should have been less than 50% since much more liability of the CGST i.e. central GST (vis-à-vis the SGST or state GST liability) was discharged by using transitional credit (i.e. the unutilized credit pertaining to the pre-GST taxes) instead of cash. Indeed, CGST collections have been lagging behind at roughly 68% of the SGST collections so far—an anomaly that should correct over time.
Apparently, there are two factors that could be inflating the centre’s indirect tax revenue in the CGA’s numbers. The first, and big, one is IGST. The finance ministry’s press releases show that less than half of the IGST collections have been apportioned to either the centre or states so far. Thus, it seems that more than half of the IGST collections have been parked with the centre and reflect in the CGA’s revenue numbers, but a significant part of that would ultimately flow to the states.
The second factor is that of compensation cess. Around Rs7,000-8,000 crore of compensation cess is being collected by the centre every month and is part of the CGA’s revenue numbers for the centre. However, the cess goes to an earmarked fund for compensating states for their revenue shortfall and it is only at the end of five years that any unutilized amount from this fund will get split between the centre and states. Hence, one could argue that the compensation cess should not count towards the centre’s tax revenue. Finance ministry releases suggest that an amount of about Rs25,000 crore has been already determined as compensation to states for the revenue shortfall faced by them in the first four months. Is it then that the compensation cess collection is being shown in gross revenue but is getting netted out by the centre’s transfers to states? That does not seem to be the case either, since the monthly figures for such transfers have remained virtually rock steady in the post-GST months.
Had the centre’s fiscal numbers been following the accrual system of accounting i.e. to take into account only revenue that belongs to a period rather than to account for revenue that is parked temporarily with it, the fiscal position would have looked far worse. Further, the bulk of the GST revenue pertaining to every month is collected in the subsequent month, and hence GST revenue that is accounted in the CGA’s figures for the current fiscal will effectively miss a month. But this particular noise does not seem to have affected overall fiscal numbers much since similar time lag was witnessed with the pre-GST taxes as well. In CGA figures, the month of July had sufficient revenue from pre-GST taxes.
If one were to knock off half of the non-apportioned IGST and much of the compensation cess collections from the centre’s revenue figures, then gross tax revenue would have been lower than the CGA’s numbers by about Rs85,000 crore for the first four months of GST collections. That is about half a per cent of annual gross domestic product. It is likely that a substantial part of the “parked” amount would stay in the centre’s finances until the end of this fiscal, helping plug the fiscal hole partially.
The bigger worry is, of course, the downward trend in overall GST collections. It is being attributed to lower compliance due to the postponement of features such as the matching of returns, e-way bill as well as reverse charge mechanism; the rate cuts effected by the GST council in October; and utilization of credits pertaining to one-time initial IGST for intra-company stock transfers. There are hopes that the overall GST collections would bottom out and start rising soon, as the e-way bill system comes into play. However, if the suspicions regarding over-statement of centre’s revenue in the current year are correct, then the revenue projections for the centre for the next fiscal will have to possibly account for some flattening of this year’s bulge.