October 2020's robust GST Collections - Find out what the Tax World is saying!

The news that the GST collections for the month of October 2020 stood at over Rs 1.05 lakh crore, crossing for the first time Rs 1 lakh crore mark since February this year is indeed very heart warming.  As per the Press Release, GST inflows is a ‘clear’ sign of a recovery in the economy after its 23.9% contraction in the first quarter of this year.

Before an euphoria of a V-shaped recovery solely based on these collection figures sets in, we need to analyse and consider several other factors that could have led to a spike in collections. From a technical analysis, two factors stand out.

Firstly, October 31^st was the last date for filing annual return and reconciliation statement for the year 2018-19. While the date was extended to December 31 st at the last moment, a large number of taxpayers have indeed filed the said returns and the statement and made payment of tax for the prior period, in the month of October 2020.

Secondly and more importantly, attention is drawn to Circular 142/20/2020 dated 9^th October 2020 which dealt with implementation of Rule 36(4) of the CGST Rules, 2017.This circular directed cumulative adjustment in September 2020 return in GSTR 3B, due to be filed in October 2020, of input tax credit for the months of February to August 2020. The circular directed that the cumulative amounts of ITC availed for the said months in Form GSTR 3B should not exceed 110% of cumulative value of eligible credit, the details of which have been uploaded by the supplier. The effect of this circular was reversal of credit availed in Table 4 (B)(3) of GSTR 3B and consequent tax payment in cash by taxpayers in the month of October 2020.

If the collection figures after discounting for above two factors are to exceed Rs 1 lakh crore, then it is indeed a time to celebrate revival of the economy

Given the surge in number of returns filed and the fact that there is clear uptake in demand due to revival of the economy as well as upcoming festive season, it’s not surprising that collections in October have exceeded 1 lac crore.  One of the reasons for higher number of returns could be the fact that the last date for claiming input credit for 2019-20 was September 30th and a lot of companies would have carried out an yearly reconciliation and asked their vendors to file returns or report missing transactions. Given the festivities, collections in November could also be robust. Introduction of E invoicing from October 1 and possible expansion of the mechanism for smaller companies from January 1, 2021, tax leakages should also reduce over a period of time. 

“It may come as a festive cheer for the Government that the GST collections crossed the mark of 1 lakh crores since February 2020. Also, the fact that the revenue for the month are 10% higher than the GST revenues in the same month last year, adds to the spirits. However, before deriving any conclusions, one needs to be wary of the fact that a lot of GST due dates were falling in September, 2020. This may have given the rebound that we are looking at and a deeper analysis of the data may reflect otherwise. For a fairer picture, I would atleast wait for three months before deducing the results. Also, an increase in GST collections cannot be a sole parameter to measure the economy revival; there are multiple factors to be considered for an economy to revive. 

Nonetheless, the gradual opening up of businesses has led to the economy stumbling back on its feet. IT, Pharma, Financial services etc. have seen an encouraging growth in the last couple of months and look promising. Sectors which were hard hit such as auto, retail, hospitality, tourism etc, have also started picking up slowly with the festive season around the corner. 

Having said so, the second wave of Covid-19 hammering various countries around the globe, followed by lockdowns are also becoming common. UK and other EU countries are expected to hit a double dip recession soon. India may not really afford this, as the first lockdown was itself one of the severest in the world; a second lockdown could send India in a tailspin. Thus, the situation does look very uncertain and one would have to wait and watch before concluding this increase in GST collection as an economic revival.”

The rise in GST revenue, both year-on-year and month-on-month, is definitely a positive indicator. This upswing can be attributed to the upturn in economic activity on account of ease in COVID restrictions and the festival spends. Another possible reason could be increase in compliances in the last month vis-à-vis previous months. With open offices, better working capital position, finance teams are back in action. Filing of past returns and payment of pending liabilities, have all resulted in better collections.

The upward trend in GST revenue collection is likely to sustain in the last quarter of 2020 due to the festive season. However, the sustainability of this trend on a long term basis would most critically depend upon the fundamentals of the economy being strong. Thus, so long as the movement of goods is not restricted, there are no further lock downs, domestic demand and increasing global sentiment to re-shore in India, may assist in better collections.

Also, implementation of E-invoicing, filing of GST annual returns and audit certificates for FY 2018-19, exchange of information between CBIC and CBDT, more use of data and analytics by tax authorities, upcoming department lead GST Audits etc. are all going to contribute positively to the revenue collections in one way or the other.

“The Ministry of Finance vide its Press release dated 1 November 2020, reported gross GST revenue collection for the month of October 2020 of INR 1,05,155 crores. This number was not only 10% higher than the GST revenue in the same month last year but was also the first time that the GST collection crossed the 1 lakh crores mark this year since February 2020. With the economy opening up and the Government withdrawing various lockdown restrictions along with the pent up demand, some rise in GST collection was expected. This significant uptick in collections on month on month basis and over same month last year is quite a welcome one for the Government and the economy in particular. Some potential reasons for this surge in the month of October 2020, could be the splurged demand on account of the festivities and input tax credit/ other similar reconciliations which were due for businesses in September, which forced the vendors to correctly report missing transactions and corresponding payment of GST. Also, on analysis of the data released by the Government, it seems that this rise in GST collection for the nation is spread among various States, with a few union territories that are tourism centric being the exception and witnessing negative growth vis -a- vis last year. However, at an overall level from a GST standpoint the economy seems to be reviving and it is expected that this trend of increased GST revenue may continue at-least for November and December due to the festival season.”

GST sweetheart faces its toughest test as it enters its fourth year. GST collections are up against a pandemic that has wreaked havoc on the global economy, and India is no exception. Nationwide lockdown severely dented state’s revenue collections, pushing them to look at alternate revenue-earning measures, including the phased opening of liquor vends, pan, and gutka shops in the first phase of relaxations restarting economic activity post lockdown. Growth in GST revenue compared to that in months of June, July, August, September, and October 2020 of -3%-14%, -8%, 5% and 11% respectively of the previous year that clearly indicates U-shaped recovery. BSE sensex also shows recovery after touching the lowest point of 26000 and then sky-rocketing more than 50% of the base in a little over six months.

However we strongly feel that benchmarking tax collections at 105,000 crore would be little unjust to the tax department. October, 2020 tax collection enjoy windfall again due to multiple reasons which is expected to fall back below 1 Lakh corres in subsequent months. Top reasons for unprecedented increase in tax collections would include festive season, Blocking of E-Way Bill generation facility for non-compliant large taxpayers after 15 October, 2020, delay in filing of tax returns by numerous taxpayers, Annual tax reverals recalculated for FY 2019-20 together with payment of additional tax in October, 2020 filings, numerous taxpayers filed annual return for FY 2018-2019 as earlier due date was pegged at 31 October, 2020 and elevated recovery proceeding initiated by central government and state goevnremnet agencies like DGGST and DG-Audit.

Subsequent months after the festive season would see a correction in tax collections owing to many reasons which include, expected second wave of Covid-19, inward looking attitude of international markets like USA, China, Japan and North Korea, opening of courts would ensure easing of tax recovery proceeding to make it less coercieve and normalization of the pushed demand which was created by the six month long lockdown.

While the revenue collection is a good measure to examine whether the economy is coming back to the normal growth trajectory, the real robustness will be known only with consistent numbers. Lot of stockists are replenishing goods due to both festive season and low inventory levels. It is expected that the demand surge will remain relatively high at least for a quarter. Another factor for enhanced collections could be the rigorous actions taken by the GST authorities in the recent past to recover pending taxes.

“The GST collections have shown a good improvement compared to last few months. This is clearly one of the strong indicators of revival of the economy. The Government has also been constantly taking number of steps towards revenue augmentation, which amongst other things include reducing the menace of tax evasion, implementation of e-invoicing, focus on returns and credit reconciliations, enhanced matching reports etc., which has further aided this process. However, some of revenue increase could also be notional e.g. denial of credit on account of mismatch [10% credit blockage under Rule 36(4) of the Central Goods and Service tax Rules, 2017] , whereby cumulative adjustments were made in the month of September, for the period March 2020 to September 2020 and additional tax paid for mismatched credits or binge buying as States come out of lock-down. On a going forward basis, it is important to enhance real revenues which is only possible by creating an environment that fosters ease of busines, clear and supportive tax policies thereby, leading to enhancement of economic activity in the country and enhanced consumption.”

GST collections have crossed Rs. 1 lakh crore mark in October 2020 for the first time in eight months since the nationwide lockdown imposed to contain the COVID-19 pandemic, halted economic activities. When the GST revenue collections embraced its highest level so far this fiscal in September at Rs 95,480 crore, it definitely indicated that the economic activities are picking up steam in tandem with the easing of lockdown restrictions. This growing chart of GST revenue collections well demonstrate effect of unlock norms and business operations gaining spur once again. Even the Finance Ministry officials have cited this landmark collection as a ‘clear’ sign of a recovery in the economy after its 23.9% contraction in the first quarter of this year. 

While this surge in GST revenue collections do bring hope for stable results in remaining part of the FY 2020-2021 but we need to be cautious about the sustainability of this upward trend. With festive season round the corner, the sales were much anticipated to go up in October considering the boost to household consumption and festival spends across the economy. Also, the cumulative effects of certain GST related reconciliations and filing of GST return for the month or period ended September, 2020, might have resulted in increased collections. 

Picture at this point of time may appear rosy but the real test of the ‘recovery’ will get reflected in upcoming months of FY 2020-21 when festivities are over, to firmly say that yes the economy has recoiled to pre-pandemic days. Continuation of upward trends in revenue will help in narrowing the fiscal deficit for 2020-21 and also to meet our compensation shortfalls to the States, one of the concerning areas for the Centre these days. Let’s keep finger crossed for the Govt to continue with this stimulus and support to trade for recovery in realistic sense on medium to long run.