A peculiar trend is playing out under the goods and services tax (GST) regime in the current fiscal year. Overall monthly collections are showing a dismal trend owing to the slowdown, with national collections growing 5 per cent in the first half.
But as GST is a federal tax collected by both the Centre and states, and then distributed among the both, ideally Centre’s portion (CGST) and states’ portion (SGST) should grow equally strongly. But that is clearly not the case this year, to date.
CGST has grown 13 per cent, faster than the growth in national GST collections, in the first five months of 2019-20 year-on-year. SGST for seven states (for whom comparable data is available) has contracted 5 per cent in aggregate in the same period.
The Centre has budgeted 15 per cent growth in CGST for this fiscal year (FY20 over FY19), and it has clocked 13 per cent growth to date, at a time when the nominal growth in the economy is barely touching 8 per cent.
States, especially Tamil Nadu, West Bengal, and Uttar Pradesh, at the same time, seem to have lost the appetite to collect GST, according to data maintained by the Comptroller and Auditor General of India (CAG) on provisional monthly accounts. Andhra Pradesh, Gujarat, Haryana, and Karnataka have shown a slight growth over the previous fiscal year in SGST collection. It has to be noted that some states also include share in CGST in these data (there is no uniformity between states in this regard).
So the Centre seems to have saved the day for itself—for now—showing strong growth. But how?
A senior finance ministry official told Business Standard that this is due to higher transfers from Integrated GST (IGST) to CGST than towards SGST, on account of adjustments being made to evenly settle the lower transfers towards CGST in the previous fiscal year.
“The IGST settlement towards CGST was low last year and has become balanced in the current year,” he said.
This shows up in the monthly accrual in the CGST account (government follows cash accounting), maintained by the Controller General of Accounts (CGA). While the average monthly accrual has been nearly Rs 35,000 crore on average, July saw a drop to Rs 24,000 crore, but August saw a huge jump to Rs 68,500 crore.
This extra pile up came from enhanced transfers from IGST towards Centre’s GST revenue.
Calling this unusual, experts said that the nature of these enhanced IGST transfers would determine the Centre’s GST revenue growth to a great extent.
“Whether this is a one-off adjustment, or whether IGST transfers to Centre will continue to remain relatively more robust than states would be critical for the Centre’s fiscal balance,” said R Kavita Rao, professor of economics at the National Institute of Public Finance and Policy. Rao was one of the authors of the 2013 study on GST commissioned by the then empowered committee of state finance ministers.
A look at which states contributed to the contraction in SGST also gives a rough indication about where the extra IGST got settled last fiscal year. While Tamil Nadu, Uttar Pradesh, and West Bengal showed contraction, Karnataka, Andhra Pradesh, Gujarat, and Haryana have shown a small, but positive growth. It is likely that the three states witnessing contraction had got a higher share of IGST last year.
Further, it is possible that some of these enhanced transfers started coming early in the financial year, as even the three-month data for April to June showed similar trend. In Q1 FY20, while CGST showed 28 per cent growth, SGST had showed a 5 per cent contraction, even then.
Under the GST law, IGST is collected on imports and interstate supply of goods and services. IGST credits earned by businesses are used by them to set off CGST or SGST liabilities, after which, the IGST gets transferred either to CGST, or to SGST, or to both, depending upon how the credits were used.
But there are several grey areas in these IGST transfers, say officials. It is the clarity on previous transfers that has resulted into a better judgment on the beneficiary of IGST, resulting into higher transfers towards CGST, they said.