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GST issues unearthed by COVID-19 crisis

  • Aug 10, 2020 | Divita S Gupta

GST issues unearthed by COVID-19 crisis

The year 2016 witnessed some massive changes in the country. With Prime Minister Narendra Modi coming into power, a lot of changes were applied to Government systems and one of them was reviving the conversation around introducing the Goods and Services Tax ( GST ) - a unified tax mechanism that replaced all the other indirect taxes like VAT, Custom tax etc. - taxes which were originally collected at State levels.

In 2017, the GST council implemented the Goods and Services tax system and urged registered taxpayers to embrace the new process with respect to filing GST returns. At the time, the Union government claimed that by implementing the GST bill which essentially favours a centralized tax system, the Indian economy was projected to grow at a rate of 2% by eliminating all the State barriers.

Flawed design

Let’s fast forward to 2020. We are in the midst of a global health crisis and an impending economic crisis are literally struggling to get back on our feet. GST collections have dropped further this year and have thwarted the projections that were made at the time of implementation. While introducing the system, the Centre offered an irresistible offer to the States - providing compensation to the States for the first five years on account of low GST collections. The compensation amount assumed that the State revenues would increase by 14% year-on-year which was an absurdly high figure, however, it was deemed necessary at the time since it helped get many States on board with the GST regime.

Plunging collections

The GST collections had started dipping way before we were hit by COVID-19 crisis. It’s safe to say the coronavirus pandemic added fuel to the fire. The collections in March-April 2020 accounted for merely 10% of the overall collections in February 2020 which sent the State governments into a state of panic. States found their revenues and financial resources exhausting quickly as the health crisis demanded heavy expenditure and the Central Government refused to release the compensation to the States for the year 2019-20. A lot of States protested against this negligence on Centre’s behalf and some of them even threatened to take the Union to the court.

Desperate measures

Eventually, the GST compensation for the months of December 2019 to February 2020 was released on June 4th. However, with rising expenditure on health infrastructure, the revenue streams of States started drying up and the Centre refused to release pending GST compensation. The GST council came together on June 12 to discuss this jarring issue of low GST collections and proposed a solution where the council would take a loan out to pay the States their GST dues. This solution attracted a lot of criticism from various experts given that there is no precedent of a constitutional body borrowing money. Some of the experts have suggested that the Centre should take the loan out instead of the GST council to compensate the States.

Tax hike on non-GST items 

To battle the low tax revenues, States have focussed on increasing revenues by charging a higher tax on two items excluded from the GST framework - alcohol and fuel. Delhi, West Bengal and Andhra Pradesh announced steep hikes in alcohol prices to further shore up the revenue. In May, the Union government hiked excise duty on petrol by a record Rs.10/litre and Rs.13/litre for diesel. States found that these steps helped them quickly make up for the loss in tax revenues without having to refer to the GST council.

At the time of GST introduction, the nation was focused mostly on the positives of this single taxation structure and not enough attention was paid to the trade-offs and the shortcomings which were laid out in the open by the COVID-19 crisis. While extended deadlines as Covid-19 relief will buy taxpayers some time, it will, in turn, widen the backlog of collections for the Government. The revenue collection is only one of the major weaknesses of the GST system unearthed by the COVID-19 crisis. The other issues that seem to be slowly mushrooming include the shortcomings of GSTN infrastructure, technological know-how among small taxpayers, and the lack of initiative to adopt automated solutions.

Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Divita S Gupta
Avalara Author Divita S Gupta
Divita has served as a writer and editor for top financial services organizations in India. She has written on topics like mutual funds, insurance, taxes, SME financing for globally recognized banking and financial organizations including ICICI, Aditya Birla Group, News Corp. With a Masters in Business Administration from Symbiosis International University, she currently owns a small business in Mumbai.

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