Rs 62,000 Crore Input Credit Claim Punctures GST In July. But It May Be A One-Time Blip

The finance ministry is a bit spooked by one number: the Rs 62,000 crore input tax credit claimed in the first batch of goods and services tax (GST) returns filed for July. It is certainly something that needs closer scrutiny, and the official concern is justified given that the total GST collection is said to be around Rs 95,000 crore (and counting, since deadlines have been extended). If the input tax credits claimed (most of it for stocks held before July 2017) are genuine, then net collections would add up to a disastrous Rs 33,000 crore in the first month of GST. Hardly something to tomtom for what is claimed to be India’s biggest tax reform.

Revenue Secretary Hasmukh Adhia is quoted in Business Standard as saying: “We are still evaluating the number of input tax credit claims. It is not adding up.”

Yes, it isn’t adding up, but there is no need to panic, or to start delaying credit on genuine claims. The worst thing you can do is to suddenly stop delivering the credits due without actual proof of wrong claims or mis-filing.

But there are good reasons to believe the July input tax claims may be a blip, and not the norm. To expect revenues to boom in a radically revised system in its very first month is no different from expecting to become a millionaire by picking your very first stock. It can happen, but the odds are against it. GST could be a long-term revenue gusher, but may not turn out to be an instant lucky strike.

Here are some reasons why input tax credit claims may not add up.

First, let’s recall that June – the month before GST – saw huge destocking operations by both manufacturers and retailers. Destocking is another word for clearing what you hold as inventory by offering huge discounts. This implies that the final tax paid on goods sold may be lower than usual, but the inputs which went into their making were paying at the old rate, and not discounted. It is not unreasonable to presume that input taxes were paid under the old rates, but final sale prices were not high enough to absorb most of those taxes.

Second, the July revenue figures may also be underwhelming because of services. Unlike manufacturing, some services have been hit hard by GST, and they have fewer setoffs. Many services, from bank charges to credit card fees to mobile bills to laundry services and eating in air-conditioned restaurants, face higher GST rates. This has dampened demand to some extent. The point to note is this: most services have lower setoffs because the main component is labour.

While manufacturing is rebounding in August, the services sector is still in contraction mode. The Nikkei Purchasing Managers’ Index (PMI) for manufacturing is positive at 51.2, but negative for services at 47.5. When PMI is below 50, it means the business is contracting. When 60 percent of our GDP is services, and a large chunk of services is under the weather, one can hardly expect a big jump in tax collections upfront.

Also, another possibility – since input tax credit is available not only on goods but also services, the high taxes paid on services may also result in higher input credit claims by non-services companies.

Third, of course, there is the possibility that a lot of wrong claims have been made. This should surprise no one, since this is the very first return being filed by GST registered *units, including individuals. A lot of small businesses and traders may also be using software for the first time, and thus wrong claims are entirely likely. To this we need to also add the reality that entire supply chains are being rejigged, and warehouses rationalised in order to optimise tax payments. This churn is surely contributing to the revenue concerns.

This is the first time we are shifting to a nation-wide destination-based tax, though central value added tax (CENVAT) and state VAT have been destination-based in a limited sense in the pre-GST era. Earlier, you didn’t have a factory based in Maharashtra buying inputs from a supply unit in Sikkim or Uttarakhand, with a warehouse based in Noida.

Under GST, we will count our chickens only after they are hatched in the final sale, and this tax number has to be tallied with all the input taxes collected along the chain. In other words, final tax collections can be estimated only after the chain is completed, and the payments verified.

Suffice it to say that in the initial months the information gap is only to be expected. Add the blips created by destocking and the need for changing supply chains, and it is clearly too early to fret about high input tax credits. Over time, they should taper down.