Consumption behaviour, populism behind GST rate cuts

Consumption trend coupled with populism and higher tax mop-up main reasons for GST rate cuts

Remya Nair, Gireesh Chandra Prasad
Updated1 Aug 2018, 12:45 PM IST
The total estimated revenue loss to the exchequer from the GST rate cuts is pegged at ₹ 70,000 crore, according to the government. Graphic: Mint
The total estimated revenue loss to the exchequer from the GST rate cuts is pegged at ₹ 70,000 crore, according to the government. Graphic: Mint

New Delhi: Over the last 13 months, the goods and services tax (GST) Council has effected tax cuts on 384 goods and 68 services under the indirect tax system. The total estimated revenue loss to the exchequer from the rate cuts was pegged at 70,000 crore, according to the government. Mint analyses the GST rate cuts.

Consumption patterns

The rate cuts reflect the changing consumer behaviour. Items that were earlier considered a luxury, such as refrigerators and washing machines, are now a necessity for middle class households.

Fearing a huge revenue gap under GST, the Council had initially included most consumer durable and personal use items in the highest tax slab. So refrigerators, washing machines, television sets and shampoos were taxed at 28%. In comparison, these items attracted over 30% tax in the earlier tax regime, which comprised excise duty and value-added tax.

However, as revenues stabilized, the Council looked to evolve tax categories that would reflect contemporary consumption trends, and increase consumption demand.

After the recent round of tax cuts, the majority of items in the 28% category are luxury items such as big cars or sin goods such as tobacco, pan masala and aerated drinks. The other items in the highest tax slab include cement, air-conditioners and big screen television sets. The government is considering lowering the tax rates on these items as well.

Populism

The first big step to reduce tax rates was in November 2017, just before the assembly elections in Gujarat and Himachal Pradesh. Tax rates were cut on 177 items, including food, personal grooming, construction material, wood and rubber. The recent reduction comes months before three Bharatiya Janata Party (BJP)-ruled states, Rajasthan, Chhattisgarh and Madhya Pradesh, go to polls. States ruled by opposition parties have been complaining that the frequent rate cuts under the GST are just a populist measure and are hurting revenues.

Revenue buoyancy

GST has helped in improving collections with tax buoyancy pegged at 1.2, giving policy makers more room to cut rates. The Union and state governments collected 94,016 crore by way of GST in May (for April sales), which was better than the 89,885 crore monthly average in the previous fiscal.

According to a government analysis of the past five-year revenue trend, May receipts for April sales represented just 7.1% of annual tax collection receipts, which indicated a promising start for the year. In June, the collection improved to 95,610 crore. E-way bills enforced nationwide for shipment of goods is expected to aid the growth in revenue collections. GST is also helping to curb evasion of income tax, as the technology-driven system makes it difficult to understate sales.

Convergence

While political and revenue compulsions forced the government to go in for a five-slab tax structure under GST, the eventual goal was to have fewer tax slabs to make the system simpler. This is possible by converging the 12% and 18% slabs, besides keeping the highest slab lean or doing away with it entirely.

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First Published:1 Aug 2018, 12:45 PM IST
HomepoliticspolicyConsumption behaviour, populism behind GST rate cuts

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