Reviving economic activity along with streamlining glitches in the GST network can make a difference. In the current scenario, both the Centre and States’ finances will be hit.

The fall in the collection of goods and services taxes (GST) in September 2019 to a 19-month low of Rs 91,916 crore was far greater than anticipated, and drives home the point that the economy is facing a demand crisis.

Collections were expected to be lower than in the previous months of the current fiscal, as several indicators of sales including those of automobile vehicles had shown a sharp dip. Collections in September pertain to sales made and services provided in August. A recovery in the collections in October should not be expected either, as demand remained sluggish in September, notwithstanding the booster measures announced by the Union government.

However, a wide regional variation in collections may be seen. While most parts of northern India observed a 15-day Shraadh during the second half of September, which is also considered inauspicious for making new purchases and investments as well as starting new projects, southern and western parts were celebrating some of their bigger festivals in the first half. Onam, in Kerala, is by far the biggest festival in the State, as is Ganapathi Puja in Maharashtra and several other States across the peninsula. Thus, a fall in collections experienced in the northern regions may be just about be offset by the buoyancy in sales in southern parts.

A fall in GST collection is worrisome as it hurts the finances of both the Centre and States, thereby reducing their ability to spend on various development projects. States might be more adversely affected due to shortfall in their revenues, compared to projections, and due to inadequate and delayed compensation by the Centre for the losses they suffer.

As noted by the Reserve Bank of India’s study of State budgets 2019-20, which was released on Thursday, the unrealistic revenue forecasts in budget estimates will leave States with no option other than expenditure compression, even for the most productive and employment-generating heads.

The report further notes that States’ revenue prospects are confronted with low tax buoyancies, shrinking revenue autonomy under the GST framework and unpredictability associated with transfers of IGST (integrated GST) and grants.

A revival in the momentum of economic activity, which helps boost consumer sentiments and spending, can assure better GST collections. That needs to be accompanied by measures to improve compliance, without however viewing every entrepreneur with suspicion.

The problems in the GST Network need to be addressed without any further delay. Improved economic activity will also ensure better direct tax collections, thus improving the fiscal space available to the Centre and States.

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Published on October 3, 2019