The GST Council meeting in Goa last week was overshadowed by the finance minister’s announcement of a steep cut in corporate tax and a few other changes in direct taxes to counter the slowdown and to revive business sentiment.
The corporate tax break naturally eliminated the chance of a cut in GST rates sought by the automobile industry, now facing its worst slump in decades, and the FMCG sector. The fitment committee with representatives from both states and the Centre was not convinced by the industry’s arguments and chose to reject their demand considering the revenue implications.
Given the state of the economy and below par revenue collections, rate cuts by the GST Council were modest this time with the lowering of tariffs for hotel rooms and outdoor catering, to provide a boost to the tourism industry, rate cuts on precious and semi-precious stones besides zero tax on jewellery exports and a hike in caffeinated beverages. But over two years after the introduction of GST, there is much to worry for both the Union government and states.
System-related issues still persist, reflected in the absence verification of statements of sales and purchases or invoice matching and leading to claims of huge input tax credit set offs and charges of shell companies being formed to beat the taxman. The delay in unveiling a revised return and a relatively softer enforcement mechanism in many states could be costly in terms of maximisation of revenues.
The other major concern now is the grand bargain of a compensation to states spread over five years to persuade them to buy into the new regime. With the growth slowdown, what that implies is pressure on the Centre to ensure that the compensation cess and funds are adequate.
In the current scenario, it is clear that states will not accept any suggestion to lower the compensation structure, especially after last week’s direct tax cuts amounting to Rs 1.45 lakh crore. The tax cuts impact states too since it will eat into their share of the tax pool. What all these signal is that the wait for rationalisation of rates or a simplified two or three tier structure may have to be longer.
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