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Govt may not heed calls to lower GST
May, 20th 2020

The exemption would block input-tax credit that would have an adverse impact on businesses and may not result in any significant gain to consumers, two finance ministry officials said on Tuesday.

The government may not accept industry demands to substantially reduce the Goods and Services Tax (GST) for six months to boost demand in the aftermath of the coronavirus disease (Covid-19) pandemic. The exemption would block input-tax credit that would have an adverse impact on businesses and may not result in any significant gain to consumers, two finance ministry officials said on Tuesday.

Input tax credit reduces the tax paid on inputs from taxes to be paid on output of finished goods.The proposed GST exemption will make output tax zero, blocking the input-tax credit, which will add to the cost of the finished goods, the officials with direct knowledge of the matter said, requesting anonymity.

“This will not only be injurious to the industry but also to the consumer at large and this is certainly not going to revive demand,” one of the officials said.

GST is an integrated levy of indirect taxes and the main source of revenue for both the Centre and state governments. It makes up about one-third of total tax receipts. Over 70% of the GST revenue accrues to the states as their own share of the receipts and funds devolved on them by the Centre.

Niranjan Hiranandani, president of the Associated Chambers of Commerce and Industry of India (Assocham), has proposed a cut in GST rates on almost all products by 50% for six months to boost demand.

Responding to the finance ministry officials’ comments, Hiranandani said on Tuesday: “In theory, yes – lost input tax credit (ITC) on exemption from GST is an issue of concern...”

The logic is that demand generation needs GST cuts. he said.“The aspect of ITC can be dealt with so long as the suggestion is taken in the proper perspective.”

Experts counselled the government to adopt a cautious approach. “There does not appear to be any empirical evidence that any country has exempted GST/VAT [value-added tax] across the board in order to drive up the pandemic-impacted economies. There could be specific sectors/areas where there may be a need to rationalise the GST rates for a temporary period to assist the sector. This needs be done very cautiously ensuring that revenue losses are minimised, leakages are avoided and the reductions do not lead to emergence of inverted duty structure situations,” said MS Mani, partner at Deloitte India.

Abhishek Jain, tax partner at consulting firm EY, said a GST exemption would entail breaking of the credit chain, higher input tax costs for businesses and complexities in compliances with credit transitions during taxable and exempt-tax periods.

“A specified percentage GST rate reduction could be explored vis-à-vis a NIL rate/exemption by the government specifically for the severely impacted sectors. In a scenario, where the said rate reduction entails accumulation of credits, the government should ensure full refund of the credits so accumulated with faster processing of such refunds,” he said.

“In addition, the government should consider providing working capital cushion to industry by deferring the payment of GST collected by few months to industry at large, without payment of any interest,” Jain said.

 

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