Analysts say the move my be politically motivated in the run-up to general elections next year
India makes GST adjustments to appease business and consumers
Rakesh Dugar, the head of consumer electronics brand Mitashi based in Mumbai, expects to see an increase in sales of washing machines and refrigerators following a reduction in the sales tax rates on dozens of products in India.
It has been a tough year so far, he says, so the move offers some relief.
“It’s good news,” says Mr Dugar, the chairman of Mitashi. “The impact will be there and as prices drop, people will be more attracted to buy these products.”
The cuts came into effect on Saturday, a week after India announced that it would lower the goods and services (GST) tax rates on 88 products, including shoes and small-screen televisions. Following widespread criticism, the levy has been completely scrapped for sanitary napkins. GST on religious ornaments made from stone and wood has also been removed. The tax rate on fridges and washing machines was reduced to 18 per cent from a hefty 28 per cent.
GST is one of the biggest economic reforms to take place in Asia’s third biggest economy. The extent of changes are indicative of the fact that more than one year on from the launch of India’s GST system, on July 1 last year, the country is still getting to grips with it. GST came into effect as a single tax regime to replace the multitude of taxes that were found across the country’s 29 states. Under GST, different products come under different slabs, but are taxed at the same rate across the country.
Analysts, though, point out that the reduction in rates is something of a double-edged sword.
“The reduction of GST on items will boost consumption in the economy and is likely to have a positive impact on the domestic manufacturing ecosystem,” says Suman Chowdhury, the president of ratings, at Acuite Ratings and Research based in Mumbai. “However, such rationalisation would lead to revenue losses for the government.”
The move could result in a revenue loss of 148 billion rupees (Dh7.9bn) a year, hurting the government’s budget, according to Acuite.
Revenues to the Indian government from GST in February were forecast at 7.44 trillion rupees for the financial year to the end of March 2019. It is expected net revenue from taxes overall is 14tn rupees as per its budget estimates for the year.
But many businesses, particularly small companies have been reeling from the introduction of GST, partly because of the time and money that has had to be invested in adapting to the new technology-driven systems, which involves regular online filing that has meant forking out more in accountants’ fees.
GST was blamed for the economic slowdown last year. The levy was introduced while India was still feeling the fallout from demonetisation, when Narendra Modi’s government suddenly banned the two highest value banknotes in November 2016. Economic growth in the quarter between July and September last year slowed to 6.3 per cent compared to 7.5 per cent in the same period a year earlier. However, things do seem to be picking up, with GDP rising to 7.7 per cent in the January to March quarter.
A cut in GST rates is seen as an initiative that is popular among businesses and consumers alike, ahead of next year’s general elections. And this is not the first time that India’s GST rates have been adjusted.
Analysts have pointed out that ahead of a key state election in Gujarat at the end of last year, the government, led by the Bharatiya Janata Party, also made a number of tweaks to GST.
Shilan Shah, the India economist at Capital Economics described these changes as “attempts to shore up support for the BJP … rather than attempts to improve the tax system”.
“This willingness to use the GST as a political tool could undercut some of the economic benefits that the GST could in principle bring.”
Despite the latest reduction in GST levies, businesses are calling for further cuts. For example, Mr Dugar points out that while tax rates have been cut for small-screen TV under 26 inches, large-screen televisions and air conditioning units are still being taxed at 28 per cent – rates which he says are too high given the fact that these are products for the masses. “These aren’t fancy and luxury things – they’re required things in houses now,” he says.
Indian Union Minister Arun Jaitley, in a post on Facebook, on Friday highlighted that there has been a reduction in the GST rates on 384 goods since the nationwide tax launch.
“The 28 per cent category is being phased out,” he wrote. “The bulk of these items remaining in this category are only luxury items or sin goods. The other items outside the luxury-sin goods category are cement, air-conditioners, large screen televisions and a handful of others.”
He added that “hopefully, with further expansion of revenue, these few items may also witness a change of category”.
India’s Finance Minister Piyush Goyal has said that the cost to the exchequer of lowering the rates will be “nominal”.
The GST rates on some products were simply “not justified”, explains Vijay Khole, the former vice chancellor of Mumbai University. He says there could be further changes to the rates over the coming years as authorities will be forced to adapt to “the ongoing generation needs and they might revise [rates] gradually”.
While the latest changes to GST may have an impact on revenue for the government, the tax regime more broadly is expected to have a positive effect. Prior to the GST reduction, economists had estimated the regime could boost India’s gross domestic product by 2 per cent in the next few years.
The tax base has widened under GST, with 11.2 million businesses registered under the new system compared to 6.4 million previously, official data shows.
Yet, some sectors are very upbeat on the reduction in levies.
Mahesh Anand, the president of Nippon Paint and the vice president of the Indian Paint Association, says he is delighted with the decision of the GST Council to bring down the rates on paint to 18 per cent from
28 per cent.
“This step is a reprieve for the paint industry and its consumers as the high GST rate on paint had added to the consecutive price hike caused by a surge in the cost of raw materials over the last few years,” says Mr Anand.
“This decision will augur well for the industry as the consumption will subsequently rise. Nippon Paint will reduce its prices in accordance with the revised GST rates to the benefit of the customers.”
This could prompt sales to go up by 12 to 14 per cent in the sector, he predicts.
At the same time as announcing cuts on many rates, the government has also eased filing requirements for some small businesses.
But, well aware that there is more to be done, India’s GST Council is meeting on August 4 to look at the challenges of the tax regime for small businesses.
As India continues to adapt to one of the country’s biggest ever tax reforms, more changes to the system will inevitably be on the way.