Reject move to increase lowest GST slab

Ministers in the panel have come up with a recommendation to increase the tax rate for the lowest slab in a four-tier structure of 5%, 12%, 18% and 28% tax rates, reports news agency PTI, respectively. In this structure, while essential goods are exempted or taxed in the lowest slab, luxury and demerit goods and services are subject to the highest slab. Cess on luxury and sin items is collected on top of the highest 28% slab. This cess is used to compensate states for loss of revenue for the transition to GST relative to the revenue they were likely to collect under the indirect system.

While the desperation of the Center and states to raise more revenue to reduce government spending amid economic uncertainty and stubbornly high fiscal deficit levels is understandable, and even desirable, the GST Council’s move To increase the rate of taxation on consumption. The range of requirements defies logic and underpins basic macroeconomics. The GST Council here runs the risk of a serious policy error that will further dampen the economic impulses and should be treaded with caution.

One of the main features of the current problems of the economy is the weakness in private consumption. The pain predates the blow from the Covid-19 pandemic and lockdowns to household income and small businesses. Even in FY19, a year before the Covid-19 outbreak, companies were reporting weakness in consumption demand. The latest revised GDP estimates for the year put the growth at a sluggish 3.7 per cent. The pandemic gave additional shocks to income over the past two years. There is no evidence so far of families recovering from them.

Worse, inflation, especially in fuel and edible oils, has eroded the purchasing power of pandemic-ravaged income. Rising raw material prices are forcing FMCG giants like Hindustan Unilever Ltd to increase retail prices to Godrej Consumer Products. On top of this, the war in Ukraine is set to further exacerbate inflationary forces by sending global commodity, food and crude oil prices soaring.

Even before these new pressures and weaknesses emerged, economists across the board were making a case for the government to provide support for consumption in the economy, even if they differ on the choice of channel to do so: while some like Jahangir Aziz wants more money in the hands of consumers to avoid permanent loss and damage, other argues in favor of infrastructure spending.

Hence, a proposal to do the exact opposite by taxing consumption in the lowest GST slab would be a fresh blow to the domestic budget and further ease the demand situation.

Instead, the GST Council should increase the tax rate for high-end consumption goods and services to the highest slab of 28%, Suranjali Tandon of the National Institute of Public Finance and Policy told Mint in an interview. According to their analysis of GST revenue collections, there is a rebound in conspicuous consumption, as also witnessed by a sharp increase in sales of premium branded cars amid the peak of the second wave in the current fiscal. Rich, unable to spend during lockdown, accumulated savings. Their suppressed demand for consumption should be tapped to generate additional revenue. There is no demand for essential things in the lowest tax slab. The rich should not be spared from this new squeeze.