Editorial: GST cheer could be hasty pudding

NEW DELHI: As promised, the GST revisions announced on Sept. 2 amount to an overhaul of the indirect tax regime. The cumbersome four-slab system has been replaced by one with just two slabs, 5% and 18% plus a 40% bucket for sin and luxury goods.

While Finance Minister Nirmala Sitharaman is touting this as structural reform, it is quite a mixed bag. Ostensibly designed to stoke consumption, it implies a revenue loss of Rs 1.8 lakh crore, 70% of which will be borne by the states. Worse, the more industrialised states like Tamil Nadu and Maharashtra will stand to lose up to Rs 15,000 crore.

By moving everyday goods down into the 5% tax bracket and throwing discretionary goods into the 18% bracket, the Union government is basically trying to win the headlines, which is a default tendency of this regime. The move will be praised by industry lobbies—which is their default tendency.

Expectations are being stoked that everything from hair oil to health insurance will become cheaper. But that will happen only if benefits are passed on to the consumer. Evidence from previous GST revisions suggests otherwise. High-value goods were moved to lower slabs in 2017, 2018 and 2019 but consumers got no price cuts. If anything, prices only rose.

The case of GST on health and life insurance illustrates this point. Even before Ms Sitharaman announced her revision, insurance companies started to lobby the government against it because they stand to lose access to input tax credit, which allows them to offset their operational costs. With GST on insurance reduced to nothing, they would have to bear the costs themselves. Now that the revision has gone ahead, the industry is planning to increase premiums.

The purpose of GST revision ostensibly is to boost consumption, which presently is growing at low single digits. But how is this objective served by taxing price-inelastic everyday-use goods lower? By doing so, demand likely will remain the same while revenue to the state goes down.

Conversely, how does putting discretionary and luxury goods in high tax brackets serve the purpose of boosting consumption? Moreover, why does the Union government feel the need to boost demand right after claiming a stupendous GDP growth rate of 7.8%? Why stimulate an economy that is already running on steroids?

This GST revision is the government’s second major move to spur consumption this year, following the income tax breaks given in the Union Budget. Despite those sops, the economic outlook continues to be downbeat: Demand is slack; savings are at an all-time low and the rupee at an all-time high; private sector capex is persistently lacklustre with the government having to shoulder the burden of investment; there is a continuing exodus of foreign capital from our capital markets; and the effects of US tariffs on Indian exports are only just beginning to kick in. Ms Sitharaman already has a tall task to perform.

Unfortunately, rearranging the GST furniture may not be adequate to what the economy needs, not by leaving the states, which are the implementing arms of the Union government, poorer because of it. There was no clarity in the compensation mechanism announced by the Finance Minister, which could end up destabilising the finances of states and force them to hike other taxes, delay development projects, and cut spending. That would defeat the very purpose of this exercise.