Don't cut GST

The Goods and Services Tax (GST) Council will meet later this week and is expected to deliberate on the possibility of cutting rates. While the Monetary Policy Committee of the Reserve Bank of India (RBI) will take a call on the policy interest rate next month, at the moment, industry is looking at the GST Council for relief. But with a slowdown sharper than expected, a decision to cut GST rates will not be easy. Theoretically, it can be argued that a reduction in rates will help revive demand, which itself will partly compensate for the revenue loss. There are vocal demands from sections of industry, particularly the auto sector, for reducing the rates. The sector has seen a severe decline in sales in recent months. However, the council would be well advised to not cut rates at this stage for a variety of reasons.

For one, any sector-specific rate reduction will further distort the system and lead to more such demands from other segments. Aside from the auto sector, businesses in the area of biscuits and cement are also looking for relief. If the council starts giving sector-specific relief, the list will only grow. Second, it is extremely important at this stage to protect tax revenues. As reported by this newspaper, till August, the gap between cess collection and the compensation disbursed to the states reached around Rs 24,000 crore. Lower than expected collection of the GST will disproportionately affect the Union government because it has to compensate the states for the shortfall. The Union government, in any case, is likely to fall short of its revenue target by a significant margin and needs a revenue growth rate of 18 per cent for the year to meet the Budget target. However, the trend so far suggests that it could fall short by over Rs 2 trillion.

While the excess capital transfer from the RBI worth about Rs 58,000 crore will help, it will not be enough to bridge the gap. So the government will either have to reduce expenditure or increase borrowings. Both will negatively affect the economy. Since the government cannot cut most of its revenue expenditure, such as interest payments and salaries, it will have to cut capital expenditure. Higher borrowing, on the other hand, will increase the government’s claim on savings in the economy and affect private sector activity. Further, it has been reported that the government is trying to cut off-Budget borrowing and expenditure. This should be welcomed. It will increase transparency and make the Budget numbers more credible. But if the revenues fall short, the government may not be able to make much headway in this direction. 

Therefore, instead of listening to sectoral demands for reducing rates, a sensible strategy in the long run would be to combine the moves to reduce the number of goods and services taxed at 28 per cent and move some to the 18 per cent rate with those to increase the rates for a host of other items placed at lower slabs. This would help the council to gradually reduce the number of tax slabs to two or three categories. This will not only help push the GST reforms agenda but also reduce the collection shortfall. The council would also do well to look at the ease of filing and increasing compliance. Cases of large-scale fraud and fake invoices have been reported. The council’s priority should be to address these issues urgently.