Finance ministry not in favour of raising GST rates on non-essential items

• Although government has eased restrictions in the ongoing lockdown and allowed businesses to restart operations, India’s more than two-month-long lockdown and flight of migrant workers from urban and industrial centres have crippled economic activity.

NEW DELHI: The finance ministry is not in favour of raising Goods and Services Tax (GST) rates even on non-essential items at a time its revenue collections are expected to be badly hit by the ongoing nationwide lockdown to contain the spread of covid-19.

The GST Council meeting is likely to be convened next month, a senior finance ministry said official under condition of anonymity.

"Post the lockdown, demand has to be induced and economic activity has to improve on all fronts, not just on essential items. Who are we to decide what is non-essential. However, the Council will take a final call on the matter," the official said.

Although the government has eased restrictions in the current phase of lockdown which is scheduled to end on 31 May and allowed businesses to restart operations, India’s more than two-month-long lockdown and flight of migrant workers from urban and industrial centres have crippled economic activity.

Goldman Sachs has pointed out that India’s stringent lockdown and tepid fiscal support, small compared with even other emerging economies, may lead to GDP contracting by a massive 45% in the June quarter.

The council is also likely to take up the issue of compensating states for their revenue shortfall by borrowing from the market. Under the GST (Compensation to States) Act, 2017, the level of protected revenues of the state governments is calculated based on a 14% annual growth rate on the FY16 base year revenues subsumed into the GST.

The gap between the state governments’ actual SGST collections and the protected revenues is required to be released by the Centre to the states in the form of GST compensation for the first five years after the transition to the GST regime.

ICRA has estimated that out of ₹1.7 trillion compensation requirement in FY2020, ₹1.2 trillion was released by the Centre to the states, leaving an unpaid balance of ₹505 billion at end-March 2020.

Jayanta Roy, Group Head - Corporate Sector Rating at ICRA Ltd said with the covid-19 pandemic and associated lockdown being expected to shrink non-essential consumption, the finances of the state governments would undergo a dual shock. “Firstly, the SGST collections would contract by 30% in FY2021 to Rs. 3.5 trillion, which entails a spike in the compensation requirement to Rs. 4.1 trillion based on ICRA’s assessment. Simultaneously, the cess collections that are meant to be funnelled towards the GST compensation would dry up in the current environment."

"Accordingly, the risk associated with the magnitude and timing of the release of the GST compensation by the Centre to the state governments has escalated sharply and would exacerbate the fiscal and liquidity stress that the states are experiencing due to the covid-19 crisis," he added.

The Centre recently enhanced the permitted net borrowing of the state governments in FY2021 to 5% of Gross State Domestic Product (GSDP) from 3% of GSDP, to address the expected shortfall in their revenues related to the pandemic. However, beyond the additional 50 bps unconditional borrowing, states need to carry out a set of reform measures to avail the rest of the 150 bps borrowing limit.

Professional forecasters veered towards a consensus that India’s economy will face its worst recession in 40 years, contracting by at least 5% this fiscal.

On Thursday, S&P Global Ratings said the Indian economy will contract 5% in FY21, assuming that the ongoing outbreak in India will peak in the September quarter while Swiss bank UBS said India’s economy could shrink 5.8% during the current financial year amid weaker-than-expected domestic economic activity and the ongoing global recession. Earlier, S&P’s Indian arm Crisil, Fitch Ratings and Goldman Sachs projected India’s economy to contract 5% in FY21.

Subscribe to newsletters

* Enter a valid email
* Thank you for subscribing to our newsletter.