The GST Council had slashed rates on 215 items with effect from November 15, of which rates for 176 items were reduced from 28 per cent to 18 per cent.
Bihar Deputy Chief Minister Sushil Kumar Modi has pegged the revenue loss in a year due to the GST rate cuts at Rs 20,000 crore. This works out to Rs 7,500 crore in the remaining four-and-a-half months of the fiscal year. The Centre will bear a burden of less than half of this, as 42 per cent of its revenues go to states.
The revenue loss figure does not take into account neutralising factors such as a rise in consumption due to resultant price cuts and higher tax receipts because of improved compliance.
“With improved compliance, higher revenue collection will make up for the notional revenue loss,” Jammu and Kashmir Finance Minister Haseeb Drabu said.
Tax experts concur with this view point. “History of tax in India has proved that whenever there is a reduction in tax rate, the collection actually goes up. Greater compliance may improve revenue. The reduction in prices of these products should also lead to increase in demand,” said Pratik Jain of PwC India.
However, Bipin Sapra of EY said, “The reduction would substantially reduce the prices of a number of commodities; however, the government may need to balance the revenue considerations too.”
Aditya Singhania of Taxmann said the sacrifice of 10 per cent tax revenue on an average will certainly have a short-term impact on the fiscal deficit. “However, the impact is likely to be temporary as the decision of rate cuts will certainly give thrust to higher demands for these products, which can contribute to India’s GDP which is scaling low at 5.7 per cent,” he said.
Abhishek Rastogi of Khaitan & Co. opined while the rate cuts would impact fiscal deficit of the government, better compliances could compensate for improved tax collections. “Further, the businesses may exhaust the transitional credits and hence the payment from cash would increase,” he said.
There is also a silver lining in the fact that the government collected Rs 95,000 crore GST revenue in October, up from Rs 93,000 crore in September. If the trend persists, this will offset any marginal loss from the tax cuts.