Why tomorrow’s GST Council meeting is crucial for economy

With vociferous demands for tax cuts on anything from cars to biscuits, all eyes are on Friday’s GST Council meeting. India Inc believes the nation’s recovery from the current economic slump hinges a lot on the decisions taken on Friday at the meeting in Goa.

However, it is not going to be easy. Clamour for tax cuts to revive business have been met by strident arguments from government officials and analysts that cuts could add to the woes of the economy at a time when there is already a slowdown, with a shortfall in tax revenues and the GDP slumping to 5 per cent in the latest quarter.

The loudest has been from the beleaguered automobile industry, which is facing its biggest drop in sales in two decades. Its demand is a cut of the GST on cars and bikes from the peak slab of 28 per cent to 18. The industry has also pointed out how it has been suffering all-round de-growth for a year now that has already led to loss of around three lakh jobs. Fears are that this could rise to 10 lakh in the capital and manpower intensive industry if the fall is not arrested soon. 

“If we miss the (upcoming) festive season, that’s it!” warned Tata Motors CEO Geunter Butschek recently, as the auto industry believes its best hope is to pass on a tax cut as discounts to consumers during the festive shopping season that starts in a few days. The festive season could be the only way to revive growth, considering that the upcoming BS-VI standards are set to hike up prices further come next year. 

However, the Fitment panel, which includes bureaucrats from the state and centre, in their recommendation to the council are reportedly not in favour of such a cut. GST collection from auto industry comes to anywhere up to Rs 60,000 crore and any cut, say from 28 to 18 per cent as demanded, will bring this down drastically. Especially, as GST collections have been dropping in recent months—it dropped below Rs 1 lakh crore last month—something of concern considering the slowdown. 

Knowing this, segments of the auto industry have also quietly pushed two other options. One is a temporary tax cut till the situation improves, while the other proposes differential tax slabs, a lower GST rate for two-wheelers and cheaper cars and a higher one for luxury vehicles.

There are other persistent tax cut demands, too, that are scheduled to be discussed at the meeting. This include biscuits as well as cement, both projecting themselves as faces of the present slowdown. 

Biscuit maker’s gripe is that biscuits priced below Rs 100 (glucose biscuits come under this) are being taxed at 18 per cent, while rusk is at five per cent and bread is not taxed at all. The issue? Since the 18 per cent tax would have increased the cost, most of the branded biscuit makers reduced quantity to bring out the item at the same cost price—this saw many consumers moving to similar packed items or cheaper biscuits from the ‘local’ unorganised sector. 

Cement industry, similarly, has asked for a rate cut from 28 per cent, arguing that it will help the construction, and in turn, the real estate segment revive. Similarly, the luxury hotel industry has asked for a cut on the peak rate of 28 per cent being charged on rooms costing more than Rs 7,500 presently, and if that is not feasible, to hike the ceiling to Rs 10,000 or Rs 12,000.

While these depend on the deliberations of the council and what views finance minister Nirmala Sitharaman as well as her counterparts from various states take, areas like outdoor catering (cut from the present 18 per cent) to match sticks (cutting dual tax rates into one) seem certain. And it seems like a foregone conclusion that additional ‘sin tax’ will be levied on cigarettes, especially considering the leeway given by the govt to the tobacco industry on Wednesday by banning e-cigarettes.

However, the most heated discussion at the council is likely to be over lottery tax rates. There are presently two taxes applied—12 per cent on lotteries by states and 28 per cent on those authorised by state governments, but run by private agencies. The Centre feels this has led to misuse and wants a uniform rate of 28 per cent, but states like Kerala are adamant that it should not be changed. With attorney general K.K. Venugopal stating either way is legally tenable and it is up to the council to take a call and Kerala finance minister Thomas Isaac diffidently calling for a vote before changes are made, it will be interesting to see how this pans out. It is to be noted that all decisions of the GST Council so far has been on mutual consensus considering the sensitivity of the Centre-state equations.