The Goods and Services Tax (GST) Council, is likely to announce a reduction in the tax rates at its Friday meeting on products and services that typically are not major revenue generators for the central and state governments.
A person familiar with the deliberations of the Council said that Items on the list of reducing tax rates include luxury hotels and outdoor catering services. The idea is to eliminate the segments of industry which don’t contribute big revenue.
A tax rate reduction in these two segments will have negligible revenue impact on the exchequer. Currently, Luxury hotels which charge a tariff of ₹7,500 a night are taxed at 28% and outdoor catering services at 18%.
However, “a rate cut on products like automobiles will have huge revenue implications to the government. The expectation of a rate cut in the last few weeks itself has hurt the auto industry prompting people to postpone their purchases,”.
The central government is already facing a major shortfall, which is also constitutionally obliged to compensate states for their GST revenue loss till 2022, while under pressure to take steps to steer the economy out of the slowdown.
States have argued that the central government can borrow from the market if there is a shortage of funds to compensate them and can repay this by extending the levy of GST cess by 2-3 years beyond 2022.
The fiscal pressures of central and state governments are likely to be discussed at Friday’s GST council meeting by Officials of the Fifteenth Finance Commission (FFC), where they will also recommend a formula for sharing the union government’s divisible pool of tax revenue with states.
The FFC has to submit its recommendations by the end of November. It will determine the way resources will be shared between the Centre and state governments for five years beginning April 2020.
The Council meeting on Friday comes amid a deepening economic slowdown which has hit revenue of both central and state governments.