Major revamp in GST structure likely; rates may be lowered on cars, biscuits

New Delhi: The Goods and Services Tax (GST) Council in its next meeting, which will be held on September 20, 2019 in Goa, may consider the demand of the auto and FMCG sector to reduce levies on cars and biscuits. The council may also consider other avenues of generating revenues to offset the revenue loss due to lowering of GST rates on autos and biscuits.

The proposal includes restructuring of the 5% slab or raising the slab rate and merging the 12% and 18% brackets as part of broader reform. But the final decision will be taken based on the revenue position.

“These proposals will be placed before the council,” a leading business daily quoted a senior government official aware of the matter as saying.

The fitment committee, comprising state and central government officials, met last week and discussed the possible revenue impact of a rate cut on automobiles. The GST Council will take a final call on the matter.

The automobile sector has been demanding for reduction of GST rates on passenger vehicles to 18% from 28% now. Worth mentioning here is that the auto sector, in addition to GST, also faces a compensation cess that ranges from 1% to 22%.

Branded biscuits in India attract a GST rate of 18%. Biscuit makers like Parle, Britannia have demanded a reduction in GST rate from 18% to 12%, the rate applicable on unbranded biscuits.

There is increasing pressure on the government to provide some stimulus in the form of tax cuts to boost consumption and prevent any further decline in economic growth. It may be noted that GDP growth fell to a six-year low of 5% in the April-June quarter.

If the GST Council agrees to slash rates for auto and biscuit than states may have to share some of the revenue loss that would accrue due to the reduction in the tax rate.

As part of the GST framework, the Centre had agreed to compensate states for five years, if their annual revenue from GST rises less than 14%. According to GST laws, the compensation will be provided only from a fund where the cess is deposited.

For FY19-20, the Centre has budgeted to collect close to Rs 1 lakh crore as cess on sin and luxury goods which turns out to be around Rs 8,000 per month. But the cess mop-up in August 2019 was Rs 7,273 crore. So it is highly likely that the actual cess collections could be lower than Rs 1 lakh crore.

Worth mentioning here is that for the first four months of current fiscal, the Centre has released Rs 45,784 crore as compensation to states. This comes to around Rs 11,000 crore per month. At this rate, the Centre will have to release over Rs 1.3 lakh crore to the states during the year. This means the govt may hold back compensation for the last three-four months of the current financial year.