Robust GST collections in October raise fiscal deficit concerns

Robust goods and services tax (GST) collections in October notwithstanding, the government is likely to miss its budgeted GST target for the current financial year, which will make it difficult to rein in the fiscal deficit at 3.3 per cent of gross domestic product (GDP).

The fiscal deficit is likely to touch 3.5 per cent of GDP, notes a report by Kotak Institutional Equities. An earlier report by economists at YES Bank had pegged the deficit at 3.7 per cent of GDP in the worst case scenario. 

While direct tax collections have been robust so far, much of the concerns stem from slippages on the indirect tax side. Recent data released by the Controller General of Accounts (CGA) showed that indirect tax collections grew by a mere 1.8 per cent in the first half of the current financial year.

On Thursday, the government released GST collection figures for October (tax payable for September). These showed that collections had surged to Rs 1.01 trillion, up from Rs 944 billion the month before. But, the overall run-rate so far is less flattering. 

“Accounting for refunds, on a cash accounting basis, September collections would likely be around Rs 939 billion implying a 7MFY19 run-rate of around Rs 900 billion,” notes Kotak Institutional Equities. 

According to this estimate, total GST collections, after making adjustments for refunds, work out to around Rs 6,303 billion so far. Of this, the Centre's share is estimated at around Rs 2,762 billion, while Rs 2,993 billion accrues to states. The compensation cess works to around Rs 548 billion.

By comparison, the total GST target for FY19 is pegged at Rs 12.5 trillion. Of this, the centre (including unallocated IGST) and states target is Rs 6.5 trillion and Rs 5.07 trillion respectively. The balance Rs 900 billion is expected to accrue from the compensation cess. 

Now, with GST collections running at a lower rate than required, a higher run rate is required in the remaining months in order to meet the budget estimates. 

“We note that the required run-rate for the rest of FY19 is around Rs 1.24 trillion," notes Kotak Institutional Equities. 

On its part, the Centre could reduce its GST shortfall by allocating a higher portion from the IGST collections. It could also hold on to a part of undistributed IGST at year-end as the YES Bank report suggests. 

Further, it could also bolster its collections by drawing on half of the unallocated compensation cess after it passed an amendment to the GST compensation cess law.

But even after this, the Centre is likely to see a shortfall of Rs 500-600 billion, notes the Kotak report. “At the current pace, we envisage a shortfall in Centre's GST collections of Rs 500- 600 billion,” states Economists at YES Bank.

The Centre could also bolster its revenue by pushing ahead for PSU consolidation/share buy backs. It could also cut its expenditure to meet the deficit target. For instance, it could partially roll over the higher subsidy burden to next year. The other option is to cut the less sticky capital expenditure. In the first half of the year, the government has spent Rs 1.62 trillion or 54 per cent of its budgeted capex.