Don’t Flog The Taxman: Slow Revenue Growth Is Thanks To DeMo And GST 

The chairman of the Central Board of Direct Taxes (CBDT), Sushil Chandra, is understood to given an earful to his regional bosses for failing to collect enough revenue in the first quarter of 2017-18 ended June.

The figures show that tax growth has been a meagre 8.4 per cent, and it was only the lower volume of refunds that enabled a gross growth in revenue collections of nearly 15 per cent, says a report in The Times of India.

While one can be sure that officials will be flogged for the rest of the year to generate more taxes, maybe the CBDT chief has forgotten the two elephants in the room: demonetisation and the goods and services tax (GST).

The economic deceleration that followed demonetisation appears to have spilled over to the first quarter of the year, especially since the implementation of the GST from 1 July has forced many businesses to clear old inventories before 30 June. Normal sales may take off only after the uncertainties over GST and supply chain bottlenecks start getting cleared.

In June, for example, car sales fell by 11 per cent, largely due to destocking operations by dealers, and even though GST has brought down car prices, the supply chain may take a while to start pumping sales. And let’s not forget, getting those who were earlier avoiding taxes, will now have to board the GST train. That will be another downer for sales.

Big retailers offered big discounts to push sales in June, and so did manufacturers and dealers of consumer durables.

Falling sales and big discounts in June meant falling profit margins. So, is it any wonder that direct taxes have taken a hit?

In the case of many services (mobile and banking services, for example), taxes have gone up, which means sales will be sluggish well into the second quarter.

July, which is when GST faces a big test, is unlikely to see any sales surge in most products, as businesses – both in manufacturing and services – are still to fully adjust to complying with GST. Also note: the first returns are yet to be filed under GST, and we don’t know what demon lurks in the GST Network software and hardware.

So, it is hardly likely that incomes and margins will pick up quickly in the quarter ending September 2017.

The CBDT chief should spare the whip, for the last thing one needs is fear of the taxman to cramp sales when demonetisation and GST are still being digested by India Inc.

The time to crack the whip is after September, once industry irons out the kinks in their supply chains and everyone gets used to paying GST.