GST Loss Worries States Reform Lays Ground For Spending Boost

(MENAFN- Live Mint) States upset by revenue loss from tax cuts have pressed the Centre to make good their losses, a day after the Goods and Services Taxes Council pulled off the biggest overhaul of India's indirect tax regime.

Eight states ruled by non-Bharatiya Janata Party (BJP) parties have urged the Centre to set up a group of ministers to study revenue losses and explore possible compensation mechanisms, said Rajesh Dharmani, Himachal Pradesh's town and country planning minister. Dharmani, who represented the state at the GST Council said revenue protection is critical for states in view of mounting fiscal pressures.

“As far as the GST rationalization is concerned, there was no difference of opinion at all; all states supported it,” he said.

Many states are concerned about losing revenue once two tax brackets-12% and 28%-are scrapped and numerous items shifted to lower slabs, a change that the Centre projects may erode tax revenues of ₹48,000 crore.

Ministers from Kerala, Tamil Nadu, Telangana, Karnataka, Punjab, Himachal Pradesh, West Bengal and Jharkhand have repeatedly sought compensation for the lost revenue; however, the Centre is confident that an expected spending boom will bump up tax revenue.

Export aid

On Thursday, commerce minister Piyush Goyal asserted the reforms will spur domestic demand and help companies serve export orders.

“Collectively, we will have a much bigger demand focus across goods and services. Economies of scale will help us grow and increase competitiveness,” the minister said in an interview. Big-ticket financial reforms starting with the GST overhaul are a calibrated step to boost manufacturing and help all sections of industry, Goyal said.

Calling it a“massive transformational decision” Goyal said the reforms will directly benefit consumers, since industries across the board have committed to pass on the reduced rates.“Every automaker has assured us that the price benefits will be passed on to consumers."

Also Read | Exporters hit by global trade actions can tap retail market, says Goyal

The tax cuts could boost India's GDP by 0.1-0.16 percentage points and lower inflation by 40-60 basis points (bps) on an annual basis, Standard Chartered Global Research said on Thursday.

In its report titled 'India–A timely GST cut', Standard Chartered said there will be limited revenue loss due to the GST cut, which could“soothe fiscal worries”, adding "we still see pressure (0.15-0.20% of GDP) on the combined fiscal deficit”. The report further added that there is need for clarity needed on direct tax/GST cess collection, and the fiscal support to exporters, in order to assess the risk of slippage.

“More importantly, the process reforms (faster registration, refunds, etc.) are likely to ease doing business, with a positive impact on medium-term growth prospects assuming implementation is as envisaged by the GST council,” the report added.

According to Goyal, exporters will also benefit from the reforms, as stronger local demand would create opportunities for both domestic industries and those catering to global markets.“Those exporters who have been affected by actions of other countries will also get a chance to tap the retail market. We are already working to promote new markets and new products,” Goyal said.

Real concerns

While states broadly support the tax cuts, their worries are real. However, non-BJP parties are outnumbered in the GST Council, where decisions are typically taken by consensus.

The tax cuts may cost Kerala ₹8,000-10,000 crore a year, state finance minister K.N. Balagopal told reporters, adding if these losses are not addressed, it will hurt the state's economy. According to Balagopal, while economic theory suggests-as the central government has pointed out-that higher demand due to tax cuts will boost revenue, it will actually depend on state-specific consumption patterns.

“There is no weightage given to production or to manufacturing states, nor to geographical factors,” Dharmani of Himachal Pradesh said, adding his state, which adopted family planning early and thus has a smaller population, is at a relative disadvantage in revenue sharing.

Also Read | GST rate cuts won't touch gold and silver-why precious metals stay at 3%

“We studied the revenue implications of tax rate cuts on four items-automobiles, health and life insurance, cement and electronics. These sectors together are expected to see a revenue loss of ₹2,500 crore a year for Kerala. We expect Kerala's overall revenue loss could be ₹8,000-10,000 a year,” said Balagopal. Almost all states will lose revenue owing to the rate cuts, Balagopal added.

“We requested that some kind of compensation should be offered to states, as existed earlier. There is no need to levy any extra taxes for that. The cess on sin goods like tobacco can be continued and the proceeds could be transferred to states,” Balagopal suggested.

The Tamil Nadu government welcomed the reform, but expressed concern over state revenue. State finance minister Thangam Thennarasu suggested either to continue the present dispensation of cess provision through constitutional amendment or increase the bound rate of tax only for sin (tobacco products, among others) and luxury goods through GST Act amendment.

Impact

As per the Council's decision on Wednesday, the compensation cess levied on cars will expire when the revamped GST regime kicks in on 22 September, but that on sin goods will continue, so that the market loans raised by the Centre to give liquidity support to states during the pandemic could be paid.

Meanwhile, the landmark GST reform is expected to stimulate consumer demand, especially ahead of the festive season, leading companies to increase output and, consequently, expand their workforce. The impact may be particularly visible in e-commerce and MSME sectors.

The broad support for the automobile industry through lower tax rates and removal of the GST cess, however, may shrink the tax advantage enjoyed by electric vehicles. The reason: EVs continue to be taxed at 5%, while GST on a wide rage of cars falls from 28% to 18%. This means relatively lower tax edge for EVs, which may prompt many buyers to go for tried-and-tested petrol and diesel cars. Among two-wheelers, the lower rate of 18% on common two-wheelers and higher rate of 40% on 350cc-plus motorbikes is expected to hurt sales in the upper segment.

Also Read | GST relief for small cars, bikes set to rev up auto demand

Lower taxes on goods carriers and cement-down from 28% to 18%-is expected to reduce truck prices and road-building costs, giving a boost to the country's logistics sector. Lower logistics costs also portends well for the competitiveness of the manufacturing sector.

Consumer goods companies are expected to respond to the changes with price cuts, promotions and extra grammage. Companies are reviewing the overall impact of the GST rationalisation, which affects their existing stock in the market with retailers and finished goods in their manufacturing units.

Disputes on whether roti and paratha should be taxed differently, and whether coconut oil should be taxed as a cosmetic or an edible oil, may be fewer in future, experts said. Such disputes often drag on for years, moving from to tribunals to the high courts and the Supreme Court, straining an already burdened judicial system.

While the premiums of life and health insurance policies will face nil tax, this may not lead to a commensurate reduction in costs, industry experts said, since the GST waiver means the companies will not be able to access input tax credits on their expenses.

Smartphone makers were left in the cold, remaining in the 18% tax bracket despite their pleas for a 5% rate. However, for makers of televisions and a range of home appliances, the lower rate of 18% may prove to be a boon, especially since the festival season is when many households choose to upgrade their appliances.

Also Read | GST 2.0: Restaurants, hotels get tax break, but no input tax credit could hurt

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