Madam finance minister, leave GST alone!
Perceivably, the Indian economy is struggling. Sales are falling for almost every category — biscuits, soaps, cars, TVs. The real estate market is floundering. Banks are still trying to atone for any sins in their past, non-bank finance companies (NBFCs) for wanton lack of diligence.
The latest gross domestic product (GDP) growth numbers are a bit of a shocker, coming in at a measly 5 percent for the April-June quarter — a six-year low. This has the Cassandras predicting a further slowdown in FY20, and in a strange twist from mythology, these predictions are believable.
All this has amped up the pressure on the government to come up with more stimulus, quickly — and the government has been trying to oblige, in a fashion. In a departure from tradition, it hasn’t thrown money at the problem. It has instead tried to offer relief to various sectors by rolling back obstructionist policy changes, and promising similar succor to other sectors. That it has attempted to dress up some of its corrective action as reforms, is a story for another day.
However, it has held its ground and resisted what pretty much every sector has been asking for: lowering the rates of goods and services tax (GST). There are quite a few arguments that point to such rate cuts being desirable, even logical.
The most persuasive, is that lower GST will mean cheaper products or more bang for the buck, depending on the product. This will, in turn, drive consumption higher, which will eventually give the economy’s growth engines that much-needed catalyst.
A close second is that tweaking GST is a better alternative to offering relief on the income tax front, because income tax is, inherently, applied progressively across income slabs while GST is a universal tax that every consumer has to cough up, never mind their socio-economic stratum.
The faction favoring this approach also advances the argument that since GST is a new tax whose teething troubles are far from over, it may be more prudent to tinker with it. A system like income tax, on the other hand, has far fewer kinks and has already been imbibed into the Indian psyche as inescapable, albeit avoidable.
Compelling though these arguments might be, it may still make sense for the government to stay away from touching GST as a means of providing relief.
There are already many voices saying lower GST rates will not necessarily spur demand as industry sees it. One simple reason: no one really goes through the arduous task of identifying the GST rate and computing the tax component of a product or service before deciding on buying it. After all, when was the last time you thought of GST before you picked up a packet of biscuit or a bar of soap from a supermarket shelf?
The more compelling reason the government is bandying about to justify steering clear of modifying GST is that of fiscal prudence. As commerce minister Piyush Goyal reminded everyone recently: “Fiscal prudence and stimulus have to coexist. Now stimulus is a great idea. Certainly, we must give stimulus… I think a fine balance is required to be done, possibly both will have to compromise a little bit.” This effectively shuts the door on the government seriously looking at GST as a tool to stimulate the economy.
The fiscal prudence argument, while admirable, can perceived as a slightly weak one. Almost every government of the last 15 years has demonstrated that it views the deficit targets set by the Fiscal Responsibility and Budget Management (FRBM) Act as more a suggestion than the word of law. The current dispensation can easily continue doing this.
Global rating agencies and institutions like the International Monetary Fund (IMF) and the World Bank may not take too kindly to what they view as fiscal imprudence — or worse, fiscal irresponsibility — in fact, India’s inability to adhere to strict FRBM targets has hardly gone unnoticed. Nor has the fact that the government routinely underreports its incomes and expenditures by increasingly resorting to off-budget financing and carrying-forward expenditure numbers.
As the Comptroller and Auditor General of India (CAG) pointed out to the 15th Finance Commission in July this year, its own recalculation pegged fiscal deficit for FY18 at 5.85 percent of the GDP when the government had reported deficit at 3.46 percent of the GDP. As far as the international community is concerned, it is probably just a perception that India’s governments have consistently shown an overall intent to help the country’s balance sheet edge towards the black that has kept things from going all omni-mega-shambles.
Nevertheless, this fiscal prudence arguments hints at what could be the biggest deterrent to tinkering with the GST rates: this government just does not have the money.
Direct tax revenues have not been encouraging of late. Tax collection for FY19 came in at Rs 11.18 lakh crore, around Rs 82,000 crore short of the targeted Rs 12 lakh crore. The trend has not improved in the first four months of FY20 either. In the April-June quarter, the government collected just Rs 2.2 lakh crore in direct taxes, and it cannot be said that the finance minister’s optimism over tax collection targets for FY20 being met are shared by tax officials.
Monthly GST collections have also not picked up the way the government would have liked. While monthly GST collections came in above the magic Rs 1 lakh crore for three months running (in March, April and May 2019), and again in July, it has dipped to Rs 98,203 crores in August.
The government’s ability to keep this number consistently above Rs 1 lakh crores is also in question. The slowdown in the economy is already pointing to lower consumption, meaning the eventuality of a lower GST payout is almost a given.
Also, since states have a stake in the GST collections, any proposal to cut GST on products or services, even temporarily, is unlikely to get the GST Council’s blessings — even if the government were to take advantage of the fact that it (either directly or through coalitions) governs 19 of the 28 states and nine Union territories. Whether it would even want to expend its political capital to get its way in this matter is debatable.
There is yet another strike against the argument for a lowering of GST rates — compensation to states. A slowing economy will inevitably mean state government coffers are not as flush as they could be. As per the rules the Centre agreed to when it rolled out the new tax, this would mean a higher payout as compensation. Any rate cut will only make this payment a bigger burden on the liabilities side of the Centre’s balance sheet.
Furthermore, over the last couple of years the list of items that attract Compensation Cess (which the government is to use to compensate states for revenues lost due to the new tax for the next three years) has already been whittled down considerably. The items that remain largely belong to sectors that are anyway facing the brunt of a slowdown in consumption — autos, aerated beverages, and the like. So the government would only be shooting itself in the foot if it agrees to review the indirect tax rate on any of these goods and services, even on a temporary basis.
It may hence behoove industry to hunt for another whipping boy, and give goods and services tax a reprieve.