Chief economic adviser (CEA) Arvind Subramanian on Wednesday hinted at further rationalisation of the five-tier goods and services tax (GST) structure and said the GST Council’s decision last week to prune substantially the list of items under the highest rate bracket won’t affect the Centre’s fiscal position much.
Chief economic adviser (CEA) Arvind Subramanian on Wednesday hinted at further rationalisation of the five-tier goods and services tax (GST) structure and said the GST Council’s decision last week to prune substantially the list of items under the highest rate bracket won’t affect the Centre’s fiscal position much. The rate cuts will also have a salutary impact on retail inflation, said Subramanian. “I haven’t done any calculations but some estimates suggest a reduction (in CPI inflation) of 20-40 basis points, and that sounds plausible,” the chief economic adviser told CNBC TV-18. Retail inflation touched a seven-month high of 3.58% in October.
Fewer slabs, bringing more items under the GST structure and further simplifications are going to be considered by the GST Council in the coming months. While land and realty would be brought into the GST ambit first, electricity and even petroleum products could be considered next for inclusion.Last week, the GST Council decided to move 178 items out of the total 227 goods and services in the top 28% bracket to the standard 18% rate slab. It also agreed on levying only a 5% GST on eating at restaurants, other than the five-star hotels, from November 15.
While the rate cuts are expected to cost the exchequer some `20,000 crore a year, Subramanian said lower taxes would lead to greater compliance and wider taxpayer base, which will offset any fiscal impact of the move and, in fact, yield rich dividends in the long run. He said it’s too early to have an accurate assessment of whether the centre’s fiscal deficit will worsen from the targeted 3.2% for 2017-18. Computing a revenue neutral GST rate (RNR) of 15-15.5%, a panel headed by Subramanian had earlier said a lower rate of 12% and a standard rate of 18% will have negligible retail inflation impact while a higher RNR (on a lower base) with merit rate of 12% and standard rate of 22% would have a significant 0.3-0.7% impact on inflation.
On cement still attracting the highest 28% GST, Subramanian said it was a big contributor to tax revenue and that the GST Council could soon take a call on this issue. Asked about the fall in exports in October for the first time since August last year, Subramanian said while initial disruptions caused by the GST system (delay in refunds to exporters) might have weighed on outbound shipments, other factors like the general state of the economy, the exchange rate and the twin balance sheet problem (over-leveraged companies and bad loan-encumbered banks) could also have played a role too. He said the government has already taken measures to soften the GST impact on exporters.
The government has assured faster refunds and relaxed certain guidelines, including allowing exporters to supply items on the basis of a letter of undertaking instead of having to furnish a bond and a bank guarantee.
He also said non-oil exports growth of around 9% (seasonally-adjusted) in recent months, excluding October, is much better than the minuscule growth in much of last year. Commenting on bond yields that touched a 14-month high on Wednesday, Subramanian said rising oil prices, higher US treasury yields and the direction of the domestic monetary policy are among the factors weighing on the bond market. The yield on the benchmark 1-year notes crossed 7% on Tuesday.