GST rates: Centre to resist demand for pruning 28% slab

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Updated: June 12, 2019 4:05:05 PM

Two important items for which a rate cut to 18% has been sought are two wheelers and cement, for which the annual revenue impacts are seen to be Rs 8,400 crore and Rs 12,000 crore respectively.

A need to spur consumption, given the slowing down of economic growth, is being flagged by those who advocate the GST rate reductions. A need to spur consumption, given the slowing down of economic growth, is being flagged by those who advocate the GST rate reductions.

Several state governments are pitching for a further pruning of the highest GST slab of 28% but the GST Council meeting scheduled for June 20 here is unlikely to take a decision on this, as the Centre is wary of the revenue implications of the move.

Two important items for which a rate cut to 18% has been sought are two wheelers and cement, for which the annual revenue impacts are seen to be Rs 8,400 crore and Rs 12,000 crore respectively. Clearly, for the Centre, which has seen a huge GST revenue shortfall of `1.6 lakh crore (against the original Budget estimate) and has set a daunting target of `1.14 lakh crore/month for the current fiscal, rate cuts on these items are unaffordable.

“States are comfortably placed as GST Act assures them a 14% growth in GST revenue year-on-year for the first five years since GST launch. However, the Centre is bearing the brunt of lower collections which will make it difficult to cut rates,” a finance ministry official said on condition of anonymity.

A need to spur consumption, given the slowing down of economic growth, is being flagged by those who advocate the GST rate reductions. Even though the Centre too shares this sentiment, its concerns over a tax revenue shortfall have, of late, intensified — the ask rate of gross tax revenue is now about 23%.

Since November, 2017, the Council has reduced the items in the 28% tax slab to about 30 from over 230 while also bringing several other items into lower slabs. It is estimated that `80,000 crore a year in revenue has been forgone due to this exercise.

“Two-wheelers shouldn’t be considered a luxury item to be taxed at 28%. Besides, any adverse revenue implication could be met by a rise in demand owing to lower cost,” Himanshu Relan, partner at Nangia Advisors (Andersen Global) said.

However, many feel the demand growth in response to lower tax could take several months to materialise which could upset the fiscal maths for the Central government.

“Any GST rate change comes with a three-fold impact of reduced collections, pick up in demand which leads to growth pickup.

“But this is a cycle that takes a while to manifest itself. Therefore, the impact on the economic scenario may not be immediate,” Archit Gupta, founder & CEO at ClearTax said.

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