GST rate cut to boost demand may be counterproductive, say finance ministry officials
Several industry associations have said demand generation would be a major challenge before the government after the lockdown is lifted and a substantial reduction in GST rates could be a solution.
The government may not accept the industry’s demand to substantially reduce Goods and Services Taxes (GST) for six months to boost demand as the exemption would block input-tax credit that would have an adverse impact on businesses and may not result into any significant gain to the consumer, two finance ministry officials said.
The GST exemption will make output tax as zero and thus the input-tax credit would be blocked, which will be added to the cost making the product costlier, the officials with direct knowledge of the matter said requesting anonymity.
“This will not only be injurious to the industry but also to the consumer at large and this is certainly not going to revive the demand,” one of the officials said.
The GST is an integrated levy of indirect taxes and a main source of revenue for both the Centre and the states. It is about one-third of the total tax receipts. Over 70% of the GST revenue accrues to the states through their own share and the devolution. Therefore, it is impossible for states to manage their finances without the GST revenue, a second official said.
Several industry associations have said demand generation would be a major challenge before the government after the lockdown is lifted and a substantial reduction in GST rates could be a solution. Niranjan Hiranandani, president, Associated Chambers of Commerce and Industry of India (Assocham) is one of its proponents who had proposed to cut GST rates on almost all products by 50% for six months to boost demand and had asked the government to include it in the part of its economic stimulus package with estimated cost of about Rs 3 lakh crore. HT reported it on April 17.
Responding to the finance ministry officials’ comments, Hiranandani said on Tuesday, “In theory, yes – lost input tax credit (ITC) on exemption from GST is an issue of concern, but that is not what the industry’s suggestion.”
“It has to be viewed from the perspective of incentivizing consumers by inducing them to make a purchase leading to the consumption which is the need of an hour. The argument is that a cut in GST for a short term, say next 6 months, will reduce the amount paid for the good or service, so the consumer will buy more (spend more) and thereby, revitalize the economy. It is a simple issue of reducing (not exempting) GST, so that consumers go ahead and buy – in the present, during the period of reduced GST rather than keep waiting for some other day to do so,” he said.
The logic is that demand generation needs reduction in GST,” he said adding “The aspect of ITC can be dealt with, so long as the suggestion is taken in the proper perspective.”
Experts, however, advised the government to adopt a cautious approach while tempering with GST rates. “There does not appear to be any empirical evidence that any country has exempted GST/VAT [value-added tax] across the board in order to drive up the pandemic-impacted economies. There could be specific sectors/areas where there may be a need to rationalise the GST rates for a temporary period to assist the sector. This needs be done very cautiously ensuring that revenue losses are minimised, leakages are avoided and the reductions do not lead to emergence of inverted duty structure situations,” said MS Mani, partner at Deloitte India.
Abhishek Jain, tax partner at consultancy firm EY said a GST exemption would entail breaking of credit chain, higher input tax costs for businesses and complexities on compliances with credit transitions during taxable and exempt tax periods. “A specified percentage GST rate reduction could be explored vis-à-vis a NIL rate/exemption by the government specifically for the severely impacted sectors. In a scenario, where the said rate reduction entails accumulation of credits, the government should ensure full refund of the credits so accumulated with faster processing of such refunds,” he said.
According to Pratik Jain, partner and leader-Indirect Tax at PwC India, providing GST exemption leads to complications in terms of blockage of ITC, coupled with rigors of anti profiteering provisions, besides imports become cheaper. “However, there is perhaps a need to make an exception for certain industry sectors such as airlines, hospitality etc. In addition, the government should consider providing working capital cushion to industry by deferring the payment of GST collected by few months to industry at large, without payment of any interest,” he said.