End of arbitrage: Uttar Pradesh eliminates GST deficit as businesses shift from Delhi

  • 22-Feb-2019
  • End of arbitrage: Uttar Pradesh eliminates GST deficit as businesses shift from Delhi

While the states’ overall GST ‘revenue shortfall’ against the assured level has come down from 20% last year (July-March) to about 10% in April-December period this fiscal, a curious picture has emerged of neighbouring Delhi and Uttar Pradesh. Delhi needed Rs 2,971 crore as GST compensation from the Centre during April-December this fiscal, more than nine times the amount it received in 2017-18 (July-March); UP, on the other hand, has totally eliminated its GST shortfall this fiscal while the deficit was as high as Rs 2,432 crore last year.

The stark contrast between the two states is believed to have resulted from businesses in large numbers shifting back their offices and warehouses from Delhi to UP as the GST ended the arbitrage opportunity that existed in the pre-GST period when the tax (VAT) rates were much lower in Delhi.

“In pre-GST regime, many companies would transfer stocks from neighbouring states with 12% VAT to Delhi with typically 5% VAT. This transfer would be shown as inter-branch transaction, and the sale of the stock from Delhi would attract lower tax. However, with GST making single tax rate across the country a reality, firms are abandoning the practice,” Vishal Raheja, DGM, GST, Taxmann, said.

A government official said UP’s success in eliminating the GST deficit was also due to efficient enforcement measures, especially in rolling out the e-way bill system. Several reports suggested that the state machinery has been strict in imposing fines on transporters who tried to evade tax in the state, he added. The northern state was also the first to implement mandatory radio frequency identification device (RFID) tag for the e-way bill.

Another source said Delhi’s GST revenue slowed down due to shrinking of the tax base consisting of wholesale dealers.

According to an informal estimate, annual turnover of such dealers in Delhi dwindled to a quarter of what it was a year ago. This also confirms the shifting of base by businesses from the tiny state. “Earlier, retailers or wholesalers from UP, Bihar and other states found it easier to procure from dealers in Delhi as it was cumbersome for them to directly deal from manufacturers. However, its easier for a manufacturer under GST to identify the dealers based on GST identification — which eliminates the need for KYC verification — and supply directly to them,” Rajat Mohan, partner, AMRG & Associates explained.

Mohan, however, added that though UP’s hard-nosed enforcement might have yielded instant revenue the approach was leading to a spate of litigation and these might come to haunt the state administration later if court rulings go against it. For instance, UP is known to have fined transporters for violation of e-way bill and made them pay penalty even when the destination of the cargo was other states, he noted.

Under the GST compensation mechanism (which guarantees 14% annual growth over 2015-16 base), the total revenue to be protected of states and Union territories for FY18 and FY19 are `42,979 crore and `48,999 crore, respectively.

Source :- Financialexpress.com

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