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Explained: How service sector gained and govt actually lost revenue post GST

May 10, 2019 11:00 IST

Across 10 prominent services, revenue to the government reduced by 20 per cent in the first year of GST compared to the last year of the service tax regime.
This happened despite tax liability against these services growing by 50 per cent in one year.

Illustration: Uttam Ghosh/Rediff.com

The first two years of the Goods and Services Tax (GST) have been associated with a lot of activity - from rate cuts to revenue loss and technical glitches.

But when it comes to the services sector, it has changed the dynamics of tax payments and collection, official data accessed by Business Standard shows.

 

Across 10 prominent services, revenue to the government reduced by 20 per cent in the first year of GST compared to the last year of the service tax regime.

This happened despite tax liability against these services growing by 50 per cent in one year.

The reason, government officials and experts said, is higher utilisation of input-tax credit for making tax payments under GST.

They said this benefited service sector majors in terms of reduced cash outgo towards indirect tax payments, improving their top line.

While companies in these sectors were able to set off about 50 per cent of their tax liability using input-tax credit available in the system in 2016-17, they paid more than 70 per cent of their tax liability using input-tax credit in 2017-18, the data reveals.

For 2017-18, tax pertains to service tax for three months (April to June) and GST for the remaining nine months (July to March).

Input-tax credit is the credit a business can claim on taxes paid on inputs.

“Increase in tax liability shows that the sectors are doing good.

"But services companies are now able to avail a higher degree of input tax as credit.

"Though this had a negative impact on government revenue, it helped reduce the prices of services to some extent,” a senior finance ministry official told Business Standard.

The list includes the services that showed a considerable jump in utilisation of credit, such as telecom and aviation, but excludes banking and insurance services.

For engineering consulting companies, the extent to which credit was used to pay tax liability rose from 41 per cent in 2016-17 to 77 per cent in 2017-18.

It increased from 58 per cent to 78 per cent for telcos.

While this observation can be held as representative neither of GST as a whole, nor across time (subsequent years), the data confirms that tax burden on services companies reduced in the year of GST transition.

Experts said the higher utilisation of input-tax credit in the first year of GST includes the transition credit - the credit available from the pre-GST regime.

But economists said a high proportion of tax payment through credit is a reason for concern.

“Typically for services, on average, the value of inputs is 30 per cent of the value of output. So a 70 per cent payment through credit earned on taxes on inputs seems exceptionally high,” said Pronab Sen, former chief statistician of India.

Under GST, services companies are able to set off taxes paid even on goods purchased as inputs.

Credit on VAT or excise duty paid on goods was not available under the service tax regime.

For example, say an IT/ITES company needs to buy 100 laptops to provide a service to an IT major.

The former can now claim credit on GST paid on these “goods”, which was not possible in the pre-GST regime.

“Service providers have been able to get a larger pool of credits in GST compared to the service tax regime and this would have enabled them to reduce the net cash payment during the initial days of GST.

"However, it would differ across sectors. Certain sectors would see more inflows on account of expansion/capex etc.” said M S Mani, tax partner at Deloitte.

He added that while the utilisation of transition credit resulted in higher overall use of input-tax credit in the first year of GST, it would reduce in subsequent years and push up the government’s revenue to some extent.

Telecom companies are facing a dip in revenue - evident from the dropping ARPU (average revenue per user) - while their input costs such as spectrum charges and licence fees are fairly the same, over the last few years.

This is reflected in the reduction in the tax liability in 2017-18.

Now, tax liability is a function of tax rates, compliance in terms of payments, and the number of transactions which is directly linked to the pace of economic growth.

GST rates for most services have effectively risen from 15 per cent under the service tax regime to 18 per cent under GST.

The increase in tax liability could also be because of improvement in tax compliance or growth in sales, experts said.

Higher credit utilisation would wean in subsequent years (including FY19) as the transition credit exhausts from the system, they said.

Abhishek Waghmare in New Delhi
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