Why hiking GST rates could actually be counterproductive
If the GST Council and the government have their way, we could see a sharp spike in GST rates across the board. The Council also wants new services to be brought under the ambit of GST and also encourage the states to increase the cess on items like fuel to increase revenues. Why this urgency?
Big revenue shortfall on GST
Since the launch of GST in July 2017, the government has struggled month after month to get close to the target. The shortfall on GST was Rs.1.25 trillion last fiscal and this year it is likely to be closer to Rs.2 trillion. It is unclear how this gap will be bridged. The current effective rate of GST is 11.6%, which is sharply lower than the revenue neutral rate of 15.4%. This is a clear revenue loss of Rs.2.50 trillion. The GST plan could look like this. Healthcare services by expensive hospitals and all forms of hotel accommodation could come under the ambit of GST. In addition, a number of items under the 5% GST bracket like economy air travel, AC train travel, tour services, outdoor catering, branded cereals and flour could be moved from 5% to 10%. The GST Council also plans to abolish the 12% slab and move items like high-end hotel rooms and business class air travel to the 18% bracket. One cannot rule out the imposition of penal duties on products like cigarettes and other luxury products. State cess on petrol and diesel could also be hiked to make up for the shortfall.
Why hiking GST is a bad idea
When GST was launched in July 2017, the core purpose was to bring more businesses into the organized segment and improve collections. That was supposed to be done through lower rates and efficiency of transactions. By hiking rates sharply, both the merits would be lost. It would not really differ from the old system and companies will be apprehensive about investing in logistics to enhance efficiency. Secondly, there is an inflation aspect that cannot be ignored. For example, hiking GST on food products and a host of services will actually push inflation higher. With the RBI already fighting against rising inflation, this could only make the task harder for the central bank. Lastly, higher effective rates would leave no incentive for the unorganized sector to enter the economic mainstream.
What are the options?
At the outset, falling GST revenues are a major worry. But, that was the risk in the system that was well known. The focus should still be to keep rates low and encourage greater compliance by simplifying the on-boarding and the GST filing system. The Councils still does not have a foolproof method of preventing slippages with a proper ITC mechanism in place. So, cascading is still a big issue. The idea must be to hold rates and simplify the process. That is likely to be more productive for India Inc!
