States wary of any move to reduce GST rates

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The Goods and Services Tax (GST) Council meeting on Friday is likely to be a stormy affair, with some states opposing the Centre’s proposal to cut tax on automobiles, citing revenue shortfalls and previous instances of businesses failing to pass on tax cuts to consumers. The opposition from states, which are members of the federal indirect tax body, may make it tougher for the Union government to quickly respond to industry demands for tax cuts on automobiles to help reverse the worst sales slump in more than two decades. Union finance minister Nirmala Sitharaman said earlier this month that a proposal for a tax cut on automobiles would be taken up by the GST Council. Kerala finance minister Thomas Isaac said the Centre should relax the borrowing limits of states, set at 3% of gross state domestic product, for a coordinated stimulus package by the central and state governments. This has been a constant demand from state governments for several years and without that reducing GST rates will not help, Isaac said in an interview. In a separate post on Twitter on Sunday, Isaac said the measures announced by the Union government on Saturday to revive economic growth rate fell “short of expectations and requirements”. He urged the Centre to stop its piecemeal approach and adopt a big-bang perspective.

Delhi’s deputy chief minister, Manish Sisodia, who also holds the charge of finance, said he was not, in principle, against a tax rate cut. “I have supported lower tax rates. But do we have data to show that tax rate reduction has boosted growth in other industries?” Sisodia said in an interview. The agenda for the GST Council meeting was not finalized as of Saturday, according to an official of a state government who did not want to be identified. Some state government officials are also worried that the GST rate cut may not be fully passed on to consumers and even if it is done, prices could be increased after some time. The directorate general of anti-profiteering has so far investigated about 125 cases of alleged profiteering and found 60% of sellers were at fault. Another state finance minister said on condition of anonymity that even if his state opposes a GST rate cut, the Centre may find enough support in the Council because a majority of the states are now ruled by BJP. “Usually, the Centre gets to implement what it wants in the GST Council,” he added. Besides the automobile industry, builders are seeking a reduction in the 28% GST on cement.

Higher GST on cement is preventing developers from signing up for a low flat tax rate system of 5% for premium and 1% for affordable under-construction houses announced in February as it does not allow them to pass on the taxes paid on raw materials such as cement to the final consumer, said experts. A reduction in GST rates or the cess on automobiles is likely to pinch the Union government, too. It is expected to face a revenue shortfall of around ₹40,000 crore by the end of this fiscal unless the trend in GST collections is reversed, Mint reported on 4 September, citing a Credit Suisse analysis. The analysis claimed that if the need for compensating states for their revenue loss funded by receipts from GST cess exceeds the cess collected, the extra funds would go out from general fiscal expenses, which can have a negative growth impact. “The central government can borrow and compensate states for any shortfall in cess collection and cess collection can be extended by two more years,” said Isaac. The GST cess on automobiles, tobacco products, and aerated drinks is meant for compensating states for the first five years of GST till 2022. The forthcoming GST Council meeting in Goa comes at a time of rising fiscal tensions between the Union and state governments. State governments are staring at a resource crunch as the current economic downturn may force the 15th Finance Commission to assume low nominal GDP growth, which would mean a smaller share of tax revenue for the states.

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