GST impact on tax: Revenue set to plummet in July-September period; Centre says impossible to quantify amount

It’s widely accepted that Goods and Services Tax (GST) will improve indirect tax revenue for the government, but the finance ministry expects that the first three months of the new regime will see tax collections plummet even as it’s unsure about the extent of the drop.

Government officials and tax experts cited use of backdated invoices, liability to pay credit on transition stock and advanced tax paid at the end of last fiscal among some of the reasons for the likely fall in revenues till September at least. In the last fiscal, the central excise duty collection rose 33.9% and service tax collection increased by 20.2%. As for states, the GST Council agreed to compensate states for any shortfall in revenue collection that didn’t grow by 14% over the FY 16 base. The compensation fund would be functional for first five years to help states tide over uncertainties of the new regime.

“The slump in revenue in the initial months of GST regime is a part of shared experience of other countries as well, and we expect the same to happen here but it’s nearly impossible to quantify it,” a government official said. He added that the government was getting reports of businesses using invoices with June dates for transactions in July, and use of improper bills. Another official said that while dubious practices will be removed overtime under GST, the inertia to change will take sometime, and the ministry was factoring its impact.

 

  

“Indirect tax collection for June will see a peak and valley thereafter for a few month as a large amount of transactions, especially in the services sector, happening in July will be shown to have taken place in June through backdates invoices,” Rajat Mohan, partner at AMRG & associates, said. He added that the government’s liability to refund credit on transition stock along with carry forward of VAT and central excise credit will see revenue drying up in July-September period. This will further be aggravated by reduced consumer appetite which was fed with attractive discounts before the roll-out of GST on several consumer goods including textiles, vehicles and FMCG among others.

“It’s likely that the consumer will have conservative approach towards spending money soon after these discounts, which is expected to lead to a subdued demand in the first few month from July,” Sanjay Garg, partner, indirect tax, at KPMG said. While the revenue collection will start picking up from October, it will stabilise only in December.

“The GST impact is so varied and wide that it’s hazardous to guess the trajectory of revenue but the true picture would emerge only in January next week when it would be safe to compare the revenue collection figures with corresponding period of a year before,” Bipin Sapra, partner-indirect tax, EY said.

Source::: Financial Express, dated 29/07/2017.