GST reprieve likely to pre-empt state VAT hike

Fearing states may start increasing VAT following the Centre’s move to increase GST rates, which could further stoke inflation, the GST Council may refrain from raising rates on goods in the lower slab of 5%, 12% and 18%. However, luxury goods, including gold, may see some rejig.

With GST collections sliding, the government has been under pressure to review taxes and compensation cess rates besides including exempted items. The GST Council meeting on December 18 is widely expected to raise GST levies on the lowest 5% slab to 6%-8% to garner more revenues.

But a bandwagon of experts, including the State Bank of India, has suggested that the move could be inflationary, especially at a time when the economy is slowing down.

Concerns have also emerged on states’ finances, which have been hit not just by the economic slowdown but also due to lower transfers from the Centre.

Delays in payment of GST dues are impacting spending programmes across states, many of which have exhausted their ways and means advances and are now using the overdraft facility.

GST collections fell short of the budgeted estimates by about 40% in the April-November period. SBI research estimates about Rs 80,000 crore of total revenue loss to the Centre. The overall tax revenue shortfall could go up to Rs 2.03 lakh crore.

“We believe that any revision of GST rates upward and inclusion of excluded items, will pose an upside risk to inflation and downside risk to the already fragile growth,” the latest SBI research report said.

Last week, India’s former chief economic advisor Arvind Subramanian had warned against raising GST rates at a time when the economy was growing at its slowest pace in six years. Though the Centre has not yet discussed the issue of GST rate hike with states, it is expected that some more luxury items will be included in the 28% rate slab and gold could attract a bigger duty of 5% from the current 3%.

The Centre also fears that states will start increasing VAT on transport fuel, which is still outside GST, to garner more revenue, once the GST rates are hiked. The move could stoke inflation in petrol and diesel rates and trigger a backlash.