New Delhi: India’s much-hyped nationwide goods and services tax (GST) is not even six months old and Prime Minister Narendra Modi has already reviewed rates on over 200 goods and services, signalling concerns over upcoming state elections amid slowing growth in Asia’s third largest economy.
The biggest reduction in levies came last week as Modi tried to give a push to consumer and capital goods sectors even at the cost of a Rs20,000-crore hit in revenues. It’s expected to provide stimulus to an economy where growth has slowed for the last five quarters.
“Growth will improve with these cuts,” said Sushil Modi, Bihar’s deputy chief minister by phone. “With better compliance we will be able to improve our revenues.”
India, the fastest growing major economy until it lost the spot to China last year, has been dealing with the shock of a massive cash ban and poorly planned nationwide sales tax. Though the GST is the much-needed reform that’s expected to put India on higher growth trajectory, its short-term pains have hit businesses.
The move indicates the government is worried about the political ramifications of slow growth and the high price of goods, said Mohan Guruswamy, chairman of the New Delhi-based Centre for Policy Alternatives, by phone.
“They are worried about everything — if economic policies are not implemented properly, the repercussions would be political,” Guruswamy said. “They can still bring down the taxes to two levels — clearly high rates on so many items would be inflationary.”
Daily-use items such as detergents, shaving cream, deodorants and cosmetics have become cheaper after the cut in levies to 18% from the highest slab of 28%.
The move, which came just before crucial polls in Modi’s home state of Gujarat, prompted the opposition take the credit. Finance ministers from Congress-ruled states jointly addressed the media after the meeting to emphasize the rate reduction happened after the party’s persistence.
Traders are traditionally a large voter base for Modi’s party, but his policy decisions in the last three-and-a-half years have not been well received. Senior members from Modi’s own party have warned it could be a risk for him in 2019 national polls.
Modi asked for amendments in GST when became aware of difficulties faced by taxpayers, home minister Rajnath Singh said.
“These revision in rates are expected to reduce prices and increase consumption, and thereby bring growth for the consumer products and retail industry,” said Aashish Kasad, Partner with tax consultancy EY India.
India’s benchmark S&P BSE Sensex dropped Monday on concerns the tax cuts would hurt government finances. Consumer goods makers such as Hindustan Unilever Ltd jumped on prospects of higher sales with reduced prices generating demand.
A shortfall in tax revenues without similar gains from other avenues, such as an asset sale in state-owned companies, could put pressure on already one of the widest budget deficits in Asia as well as stoke inflation.
The federal government lost Rs60,000 crore in revenues and state governments took a hit of Rs30,000 crore in the first three months of the GST’s implementation since 1 July, Amit Mitra, finance minister of West Bengal, said Friday.
The government will now have a serious challenge in meeting the revenue targets, said Rakesh Nangia, Managing Partner, Nangia & Co LLP. “It seems the government is banking on higher collection due to better compliance and increase in taxpayers tax base.”