Auto sector's rate-cut hopes fade as GST cess collection declines

Economic slowdown weighs on revenue collection, requiring states to depend on compensation to achieve 14% growth
Cess collection under the goods and services tax (GST) — to compensate the states for their revenue loss in the two-year-old indirect tax regime — has fallen short of requirements in the first five months of the fiscal year, dimming rate-cut hopes for the auto sector in the upcoming GST Council meeting on Friday. Some states have asked for rate cuts for five-star hotels. Industry, too, has requested cuts for biscuits and cement.

“More than rate reductions, discussions in the meeting are going to hover around the bleak revenue position. Cess collection falling short of requirements will drive the narrative,” said a government official.

According to the data accessed by Business Standard, there is a gap of around Rs 24,000 crore between cess collection till August and the compensation disbursed to the states. A slowdown in the auto sector has contributed to the bleak picture.

Around Rs 41,000 crore has been collected till August, as against Rs 65,000 crore disbursed. The shortfall is being met by the surplus pool of the previous fiscal year. The states were promised compensation for five years since the GST came into effect to make up for their revenue shortfall because they lost autonomy over indirect taxes.

“States require about Rs 13,000 crore a month as against Rs 8,000 crore being collected by way of compensation cess,” said a government official. Compensation is released to states every two months, with the latest one of Rs 28,000 crore disbursed last month. 

The Council will also meet the 15th Finance Commission to recommend devolving funds for five years. States are expected to ask for extending the compensation period by another three years beyond 2021-22. This will lock their annual revenue growth at a minimum of 14 per cent, irrespective of the collection till 2024-25.

Union Finance Minister Nirmala Sitharaman has been saying that the demand for a rate cut on the auto sector will be taken up by the Council on September 20. M S Mani, partner, Deloitte India, said: “A reduction in the compensation cess, if the rates on automobiles are cut, is going to be extremely challenging.” 

  • A shortfall of Rs 24,000 cr between collection and disbursement to states
  • Rs 13,000 cr per month being disbursed to states as compensation cess versus Rs 8,000 cr being collected 
  • Economic slowdown weighs on revenue collection, requiring states to depend on compensation to achieve 14% growth
  • Slowdown in auto and other items attracting cess resulting in lower-than-expected cess collection
  • Few items falling under 28% GST slab attract additional cess, such as auto and tobacco
“While states have their revenues underwritten by the central government and have a limited leeway on rates, the central government would need to consider resource mobilisation,” he added.

GST collection failed to touch Rs 1 trillion in August. It needs to be Rs 1.17 trillion each month to achieve the target for the fiscal year.

“Compensating states, assuming 14 per cent annual growth in the current economic environment, is not easy. But there is no reason to panic because directionally we are going towards a larger tax base with moderate tax rates,” said Pratik Jain, partner, PwC India. 

Rate cut for hotels

Even as rate reduction in automobiles may not find many takers among states, Goa and Rajasthan, among other states, will pitch for rate rationalisation for five-star hotels. Currently rooms with a fare of Rs 7,500 per night and above attract a GST rate of 28 per cent. Rationalisation could be by way of increasing the threshold from Rs 7,500 to Rs 10,000 per night. 

“Reducing the hotel rates to 18 per cent is a good idea because 28 per cent was originally meant for certain sin and luxury items (excluding services). Hopefully, it would spur tourism,” said Jain.

Bipin Sapra, partner, EY, said hotels should not be taxed at 28 per cent. The Council will take up exempting businesses with an annual turnover of up to Rs 2 crore from filing annual GST returns for 2017-18 and 2018-19, sources said. 

Besides, the Finance Commission has floated a discussion paper on rate rationalisation. It is likely to raise the issue of dual rates for restaurants — 5 per cent and 18 per cent — to give an option of claiming input tax credit. Currently, restaurants are charged 5 per cent, but without input tax credit.

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