India’s federal tax council is likely to ignore the rising chorus for tax relief at its Friday meeting and make only minor tweaks instead as a revenue shortfall looms, a person familiar with its deliberations said.
The Goods and Services Tax (GST) Council at its 37th meeting in Goa will also consider states’ demand for extending the GST cess on select products like automobiles and tobacco beyond 2022 in view of the bleak revenue collection trends.
Items likely to see a tax cut include luxury hotels and outdoor catering services, the person cited above said on condition of anonymity. The idea is to provide impetus, by way of lower taxes, to segments of industry which are not big revenue contributors. The Council will also consider a uniform tax rate for lottery tickets, which are currently taxed at 12% or 28%, depending on whether they are sold within the organising state or outside.
“A tax rate reduction in these two segments will have negligible revenue impact on the exchequer. On the other hand, a rate cut on products like automobiles will have huge revenue implications to the government. The expectation of a rate cut in the last few weeks itself has hurt the auto industry, prompting people to postpone their purchases," the person said. Luxury hotels which charge ₹7,500 and above per night are now taxed at 28% and outdoor catering services at 18%.
GST receipts falling below expectations have nearly killed the scope for tax rate cuts except where revenue loss is insignificant and it is possible the council may consider raising taxes on one or two items which may not be essential and fall in the category of sin goods such as caffeinated drinks, said a second person familiar with the discussions between central and state officials who did not want to be named.
“The pressures of meeting revenue targets, which have been lower than expectations, would be a key consideration in any decision on reducing rates in on Friday’s GST Council meeting," said M.S. Mani, partner, Deloitte India.
The dismal trend in GST collection is emerging as a contentious issue between the central and state governments at a time the Fifteenth Finance Commission (FFC) is set to submit its recommendations on sharing Union government’s tax revenue with states for the five years starting April 2020. The FFC which is set to submit its report in November, will discuss GST revenue trends with Council members during Friday’s meeting. Mint had reported on 4 September citing a Credit Suisse analysis that the sluggish GST revenue growth, unless reversed quickly, could lead to a ₹40,000 crore shortfall by the end of the current fiscal, straining finances of the central government which is required to make good on states’ revenue loss.
The Centre, which is constitutionally obliged to compensate states for their GST revenue loss till 2022, is under pressure to take steps to steer the economy out of the slowdown. States have argued that the central government can borrow from the market if there is a shortage of funds to compensate them and can repay this by extending the levy of GST cess by 2-3 years beyond 2022. The fiscal pressures of central and state governments are likely to be discussed at Friday’s meeting.