Too Good To Last

Fiscal 2019 seems to have ended on a positive note, with total Goods and Services Tax (GST) collection of Rs.1.14 trillion in March — the highest ever recorded since its introduction in July 2017. While that could seem a silver lining, a report by Kotak Institutional Equities states that the numbers are prior to refunds and the final numbers will be released later (cash accounting basis).

Accounting for refunds, on a cash accounting basis, March collections will end up likely be around Rs.1.04 trillion. While the Centre has budgeted GST collections at Rs.7.6 trillion (including unallocated Integrated Goods and Services Tax or IGST and compensation cess), the states’ budgets peg SGST collections at Rs.6.1 trillion. This implies, the report states, budgeted total GST collections at Rs.13.7 trillion in the current fiscal (FY20), amounting to a monthly run rate of Rs.1.15 billion.

While a strong improvement in GST collection is a positive, it remains to be seen if such a trend can be maintained — especially since the March revenue would have been higher due to year-end adjustments as well. The Union Budget for FY20 has budgeted a 24% growth in total GST collections, which will be difficult to achieve. The government has budgeted GFD/GDP (where GFD is gross fiscal deficit) at 3.4% in FY20 — which is a deviation from the target of 3.1% set under Fiscal Responsibility and Budget Management (FRBM) Act.

The report states that if GST collections do not improve further and sustain, the pressure on the central government’s fiscal position will continue. What makes the target for FY20 challenging is that the Modi government in the run-up to the elections has already slashed tax slabs across several categories. That the rate cuts are not exactly spurring consumption is evident in the fact that auto sales have been falling dramatically. Even the beleaguered real-estate sector has not had a big pick up in the residential segment despite GST cuts as inventory levels in key metros are still elevated. The weak fiscal situation has been weighing on the debt markets with the yield curve continuing to signal its worries.