The economic impact of Covid-19 and the transformations in GST system.

Dr. Jaya S Anand _ Professor, Institute of Management in Government
Ria Idicula _ Research Scholar, Institute of Management in Government


The introduction of GST in the country was laid down in the historic Budget Speech of 28th February 2006. Thereafter, there has been a constant endeavour for the introduction of the GST in the country whose culmination has been the introduction of the Constitution (122nd Amendment) Bill in December, 2014.

The Central Government levied tax on manufacture (Central Excise duty), provision of services (Service Tax), interstate sale of goods (CST levied by the Centre but collected and appropriated by the States) and the State Governments levy tax on retail sales (VAT), entry of goods in the State (Entry Tax), Luxury Tax, Purchase Tax, etc. Multiple taxes which are being levied on the same supply chain resulting in cascading of taxes, as taxes levied by the Central Government are not available as setoff against the taxes being levied by the State governments. The creation of tariff and non- tariff barriers such as Octroi, entry Tax, Check posts etc. hindered the free trade flow within the country. Alongside this, the large number of taxes create high compliance cost for the taxpayers in the formof number of returns, payments etc. Goods and Services Tax (GST) subsumed all taxes into a single tax which will be levied on the supply at every stage in the supply chain. Thus GST is a unifier that integrates various taxes being levied by the Centre and the State and provides a platform for forging an economic union in the country.

The entire Indian economy faced an unexpected standstill due to the COVID-19 pandemic leading to a complete lockdown for over a month from March 2020. However the government was proactive in taking the measures to combat the COVID-19 and its effects by providing certain relaxations for GST compliance since March 2020 so that the total economy can be boosted back to normalcy at the earliest. These include conditional late fee waiver on completion of GST filings for February, March and April 2020 within specified dates of June-July 2020, interest exemption for small taxpayers and also with reduced rate at 9% and for which slab w.r.t turnover applies, and an extension to the validity of e-way bills till 30th June 2020- extending the due dates of Filing the GSTR-1 and GSTR-3B Returns without late fee as many businesses and factories did not function during the lockdown period. GST Reconciliations with 2A could be cumulatively done for the months of Feb to August and adjustments can be done while filing the GSTR-3B of Sept 2020. This definitely helped in improving the management of cash flows under the given circumstances.

Another welcoming move was enabling the EVC option while filing the GSTR-3B of the companies instead of DSC Key, which was helpful under the given lock down situation. These extensions were helpful in two ways: one is the last minute rush could be avoided for the registered assesses in filing the GST returns around the June 24th 2020 and in the other way it was helpful for the government to receive the taxes bit early.

Although the pandemic hasn’t led to any prominent strategic changes to GST policies, few relaxations and provisions are granted to business. The amendments were made in terms of:

  1. Eligibility of ITC paid on face masks and sanitisers to employees
  2. Availability of ITC on invoices not uploaded by suppliers due to lockdown
  3. Advances received before lockdown, but contracts cancelled due to COVID-19
  4. Treatment of ITC on goods destroyed/disposed of due to COVID-19
  5. Treatment of discounts given during lockdown
  6. Treatment of bad debts during the lockdown.

This paper attempts to throw-light on the challenges faced and the impact of COVID-19 on the economy. The transformations brought to the GST system are also discussed.

Economic situation:

The Indian economy, after subdued growth in 2019, had begun to regain momentum from January 2020 onwards, only to be stalled by the once-in-a-century black swan COVID-19 outbreak. The economy witnessed a sharp contraction of 23.9 per cent in Q1: FY 2020-21 and 7.5 per cent in Q2: FY 2020-21 due to the stringent lockdown imposed during March-April, 2020. The pandemic induced twin economic shock to India in the form of Gross Value Added (GVA) rate and employment rate. Various industrial sectors also faced crisis during this phase- supply chain disruptions impacted the flow of agricultural goods leading to high food inflation and adverse initial impact on some major agricultural exports. The manufacturing sector was also hit hard in the first quarter but has since picked up. Construction and Services sector were hit the hardest as the pandemic induced requirements of social distancing and minimising of personal interaction.

This economic slowdown also pushed both GST and cess collections down over the last year, resulting in a 40% gap last year between the compensation paid and cess collected. As per the Centre’s estimates, the States’ GST revenue gap in 2020-21 will amount to about ₹3 lakh crore, while cess collections are only projected to reach ₹65,000 crore, leaving a shortfall of ₹2.35 lakh crore. The current economic position has gone against the GST Compensation Act, 2017 which guaranteed States that they would be compensated for any loss of revenue in the first five years of GST implementation (until 2022) using a cess levied on sin and luxury goods.

The Finance Secretary- Mr.Ajay Bhushan Pandey stated that the Centre has calculated that only ₹97,000 crore of the shortfall is due to GST implementation, while the rest is due to the impact of COVID-19. The Finance Minister described this ₹97,000 crore as “that portion which is strictly hardwired in the Compensation Act”.

Keeping this in mind, two options were presented to the Council. “A special window could be provided, in consultation with the RBI, so that the States can get this ₹97,000 crore at a reasonable rate of interest, and this amount can be repaid after five years through the collection of cess”. The other option is that “this entire gap of ₹2.35 lakh crore can be met by the borrowing by the States. There also, arrangement could be made with the RBI and certain facilities could be provided.”

State of Kerala:

With COVID-19 seeming to continue its unstoppable march across the globe, Kerala’s economy has also taken a massive knock on the face. Forecasting economic variables in the midst of the pandemic is a tricky affair. The number of unknowns is too large to make realistic forecasting. The Kerala State Planning Board (KSPB) undertook an assessment of the losses to Kerala economy from April 2020 to March 2020 and the first three months of 2020-21. The study indicates that the losses to the economy are likely to be massive. It is very likely that the Kerala economy may also grow at negative rate in 2020-21 if economic variables are not revived at the earliest.

Studies conducted suggest shortfalls in the Gross Value Added to Kerala's economy from March 2020 and in the first quarter of 2020-21. (April, May & June 2020). An 80 per cent loss in the monthly value addition during the lock down period is assumed. During the month of march 2020, the report estimated Rs.29,000crore shortfall in value addition due to 10 days of loss in production and slower economic activity. An estimate of Rs.80,000crore of loss is made during the first quarter of 2020-21 (April, May and June). This is calculated with an assumption of 5 per cent production increase during 2020-21 than the previous year.

The total loss of wages or earnings by the self-employed and casual workers in Kerala is estimated by Planning Board is Rs.350 Crores per day. (Estimation based on the assumption that the size of the workforce in 2020 remains the same as it has been in 2018).Based on this the total loss of wages and earnings in the state during the period between March to June 2020 is estimated as Rs.15000 crore.

The heavily export oriented IT sector in Kerala is also suffering loss of income from its markets in Europe, United States and the Gulf regions. The airlines, hotels, tourism and entertainment and event management sectors are suffering the most. The total decline in earnings is estimated to Rs.4500 crore in the first three quarters of 2020-21.

The study conducted by Gulati Institute of Finance and Taxation (GIFT) estimated the revenue shortfall on each category of taxes in Kerala.GST collection slid 37.4% overall with the goods segment accounting for a fall of 37.5% and the services segment accounting for a fall of 36.8% between March and August 2020 when compared to the same period last year. The overall GST collection fell from ₹10,079 crore during March-August 2019 to ₹6,307 crore 2020.

Kerala already being under tremendous stress due to previous natural disasters including Cyclone Ockhi of 2017, two consecutive floods of 2018 and 2019 and the pandemic affected the state's economy along with the return of non-resident Keralites (NRKs) from abroad, mostly following job loss. The state's growth rates which were otherwise higher than the national rates of growth saw a downward trend in 2019-20 due to the setbacks the state economy faced. "Kerala suffered a revenue loss of Rs 1.56 lakh crore due to COVID-19”. And reports have indicated that Kerala is striving to implement strategies to help improve the situation during post- COVID period.

State GST Revenue Gap Fund

As per the GST compensation Act, the shortfall in the State GST collection will be compensated from the fund of GST Cess collected by the Central Government. Inadequate collection and availability of fund in the GST cess accounted in wider gap and delayed release of GST compensation to States by the Centre.

While states are battling an economic struggle the Centre government’s proposal of borrowing by states to meet GST revenue shortfall created an element of debate & discussion. However this proposal was initially declined by a few states including Kerala. In the borrowing plan (option-1), the central government would borrow from market Rs 1.10 lakh crore, which is the revenue shortfall on account of the GST implementation. The remaining Rs 73,000 crore short fall is estimated to be the revenue impact of the Covid-19 pandemic. States choosing the first option would enjoy a further 0.5% relaxation in States’ borrowing limits under the FRBM Act. The second option given by the central government was that the states borrow the entire Rs 1.83 lakh crore collection.

Although Kerala rejected the proposal initially they became among the last few states of the Goods and Services Tax (GST) Council to accept the Centre’s borrowing option of Rs1.1 lakh crore to meet the indirect tax revenue shortfall in 2020-21. Kerala has been given the permission to borrow Rs 4,522 crore thereby reducing the number of dissenting states to three from 10 in September. Now there are only three states – Punjab, Jharkhand and Chhattisgarh – that are yet to accept the proposal.

Road ahead:

In light of the Covid-19 crisis, the government had sensed the need to react and cushion the economic fallout. New policies and action plans need to be in place and implemented at the earliest. The Government has announced 100 projects that will boost the socio-economic condition of the State and help revive from the crisis.

The help overcome the crisis, focus towards industrial development is essential. IT and education should also be given importance- Kerala Start up Mission (KSUM) has already devised plans to support start-ups in the IT, healthcare and related areas. The government hopes to provide free Internet connection to 20 lakh households below the poverty line through the K-FON project of the government.GST waiver at the national level should be given to the IT sector in order to attract more players into the market. In addition motor vehicle tax for electric and hybrid vehicles would be relaxed. 50% waiver was announced on one-time building tax for eco-friendly constructions.

Entrepreneurship is a significant area that could help stabilise the economic impact. A four-point action plan is proposed to encourage innovation in different spheres. A digital platform for innovators to upload inventions would be set up. Innovations would then be assessed by K-DISC. Promising innovators would receive mentoring and financial aid. Intensive efforts are being taken to help raise Kerala’s position to one among the top 10 in the ease of doing business index in 2021-22. Procedures will be simplified in such a manner that applications need to be submitted only at one place; advance sanction will also be accorded.

The tourism industry needs to be revived to help improve the fund-flow into the state. Relaxation and concession needs to be given on tax, documentation & compliance followed earlier. Agriculture and coir industry also needs to be taken into consideration. The budget has promised support to famers and the coir industry in terms of employment opportunities & financial aid this will help improve the economic conditions and revive the economic stability.

The Government has also proposed micro planning to identify, register and provide poor families with jobs, ration cards and health cards. These micro plans will be implemented by Kudumbashree after they are examined by Panchayath or Municipal Councils.

The State G.S.T Department will be restructured by having separate wings for Tax Payer Services, Audit, Enforcement and Intelligence.

The timely measures and actions taken by the government have indeed made Kerala a role model for other states to follow. Hoping that the measures taken by the Government will prove fruitful and help pave way for the state to soar back with pride.


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