Revenues from the Goods and Services Tax (GST), arguably the biggest tax reform since India's independence, need a boost. GST collections for August did improve from the previous month at a time when GST rates were lowered on some items. Total GST paid for August stood at Rs 94,442 crore compared with Rs 93,960 crore in July, but these levels may not be enough.
The central government intends to deliver on its promise of keeping gross fiscal deficit at 3.3% of the GDP. To help it achieve the target, the GST run rate needs to reach nearly Rs 1.2 lakh crore per month in the second half of the ongoing financial year.
This is WHY:
While the headline GST collection number at Rs 0.94 lakh crore looks promising, the effective number could be lower. Allowing for refunds, on a cash accounting basis, August collections would likely be around Rs 0.89 lakh crore. This means that the monthly run rate of GST could be about Rs 0.90 lakh crore for the first six months, i.e. April–September 2018. This assumes that the CGST component for 1HFY19 would be around Rs 2.15 lakh crore, with unallocated IGST at Rs 0.30 lakh crore and SGST would likely be around Rs 2.47 lakh crore. With respect the monthly run rate, the Union budget assumptions indicate a GST run of around Rs 1.05 lakh crore for the first six months. So far, these numbers have belied hopes.
Clearly, the task is cut out for the second half of the year. This time period is marked by festivals and holidays. But the last quarter, i.e. January–March, often sees hectic activity. This could be an interesting time for the economy, given that Lok Sabha elections would be a few months away. Economic activity does pick up ahead of elections, thanks to government spending. But will it be enough? The implied GST run rate of nearly Rs 1.2 lakh crore translates into month-on-month growth of 8% in CGST, SGST, and IGST for the next six months. The jury is still out on whether this tall order can be achieved. While it is unlikely that such a growth in momentum is possible in the near term, there can always be surprises in store.
The government has time and again reiterated its commitment to sticking to targets spelt out in the budget. The financial markets, especially the debt segment, watch this like a hawk. The fiscal deficit target is 3.3% of GDP. While the GST run rate poses challenges to the fiscal math, the government is looking at other ways. True that the shortfall in taxes can be managed by higher-than-budgeted direct taxes, but the stock market situation may not help the government collect more revenue via the divestment route. Also on the table are expenditure cuts. The government's expenses can be grouped into two buckets: revenue-related expenditure (interest payments, subsidies, pay and allowances, agriculture and farmers' welfare, education, health, etc.) and capital expenditure (spending related to defence, railways, roads, housing, etc.). The government needs to reduce revenue expenditure in order to keep its total expenditure under check. This is critical to achieve the 3.3% fiscal deficit target.
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