High Inflation to delay tax overhaul States want
revenue cover, GST hikes
The states’ demand for a hike in GST rates for a slew of
items, including those consumed largely by the
high-income population, follows a realisation that a
much-awaited restructuring of the GST slabs may be
delayed due to the prevailing high inflation.
Even as a sticky inflation
is bothering the government and the central bank, an
impending revenue shock has prompted some state
governments to make a pitch for partial roll-back of a
series of rate cuts since the roll out of the goods and
services tax (GST). Besides, all Opposition-ruled states
and some BJP-ruled ones have renewed the clamour for
extension of the revenue protection accorded to states,
beyond June 30, the end date for a current five-year
compensation mechanism under the Constitution.
The states’ demand for a
hike in GST rates for a slew of items, including those
consumed largely by the high-income population, follows
a realisation that a much-awaited restructuring of the
GST slabs may be delayed due to the prevailing high
inflation. The slabs recast would have raised the
weighted average GST rate from around 11% now to the
revenue-neutral level of over 15%.
Kerala finance minister KN Balagopal told FE: “We have
identified 25 items, including refrigerators, where
benefits of GST rate reductions have not been passed on
to consumers by the companies. These rate cuts could now
In December 2018, the GST Council slashed the tax rates
on a large number of items, including consumer durables,
electronic goods and furniture items, from 28% to 18%.
These include some televisions, water coolers, ice cream
freezers, milk coolers, food grinders, paints, digital
cameras, video camera recorders and video game consoles
and sports requisites. In November 2017, the rates on
chocolates and other food preparations containing cocoa
were reduced from 28% to 18%.
“Even though the GST compensation mechanism was for five
years, we are expecting the central government will do
something to compensate states after June 30. Otherwise,
we will be in big trouble,” Balagopal said. Many other
states, including Tamil Nadu, West Bengal, Chattisgarh,
have also written to the Centre demanding that the
compensation period be extended by 2-5 years to bolster
On Sunday, Chattisgarh chief minister Bhupesh Baghel
wrote a letter to his counterparts in 17 other states,
including five states ruled by the BJP, seeking their
support to convince the Centre to extend the GST
compensation mechanism beyond June 2022. Fearing an
about `20,000-crore revenue loss to the state in FY23
due to the cessation of compensation, Tamil Nadu finance
minister Palanivel Thiaga Rajan recently said the Centre
should extend the mechanism for another two years.
“Taking into account the current economic situation,
Covid situation and the world economic situation, it is
the responsibility of the Centre to look into the matter
very seriously,” Balagopal said, adding that the Centre
has curtailed taxation and financial powers after GST
was rolled out in 2017.
A group of ministers headed by Karnataka chief minister
Basavaraj Bommai is yet to have formal deliberations on
GST slabs recast, an official said. The panel was
constituted in September 2021.
“It may be better to undertake a comprehensive rate
rationalisation exercise even if it takes a little more
time. Given the current situation, including concerns
around inflation, increasing the rates on consumer
products may not be desirable,” said Pratik Jain,
partner, Price Waterhouse & Co LLP.
Before GST’s July 2017 lauch, an expert committee had
determined the revenue-neutral rate for the new tax at
15-15.5%. While it was doubtful if the GST slabs
corresponded to the RNR, economic slowdown and Covid-19
have forced the GST Council to cut rates further on a
large number of mass-consumption items, further
undermining GST’s revenue productivity.
In the last two years, the Centre had to resort to
aggregate borrowings of Rs 2.69 trillion in order to
make good the shortfall in the GST compensation pool.
With the hardening of commodity prices after the
Ukraine-Russia conflict, India’s wholesale price
inflation (WPI) reversed it trajectory in February 2022
and increased to 13.11%, after coming in at 12.96% in
January. Retail inflation (CPI) in February also rose
marginally to 6.07% from 6.01% in the previous month,
hovering over the upper bound of the RBI’s inflation
target range of 2-6%.
Under the GST compensation mechanism, which is
constitutionally-guaranteed, state governments are
assured 14% annual revenue growth for the first five
years after the tax’s July 2017 launch.
Officials are hopeful that the average monthly GST
collections would improve to about Rs 1.35 trillion from
Rs 1.23 trillion in FY22, thereby generating about Rs
90,000 crore in additional state GST collections in the
next financial year.
Finance minister Nirmala Sitharaman told Parliament
recently that the statutory requirement was to
compensate the states for GST shortfall only for the
initial five years after the GST’s launch. She also
pointed out that just for servicing the loan by the
Centre to compensate the states for 2020-21 and 2021-22,
the designated cesses will need to be in place till the
end of FY26.