Decisions of the GST Council and the Government to push tax rates upwards will only give speed to runaway inflation
Developments in the domains of economics and politics are not easy to decipher for common people. If the change of government in Maharashtra was for an ideology, how did Arrey Colony metro depot and a water project take precedence? In times of high inflation, the GST Council and the direct tax board decided to raise the rates on many items. This is a repeat of what was done in January even while the wholesale price index has touched 1588.
In January this year, the rates on critical textiles, handloom and shoes were raised from 5 to 18 per cent. Now, the Reserve Bank, SEBI works are defined as services and brought under tax net. Even a cheque book, normal for a banking transaction, invites tax at 18 percent rate. Cumulatively, they would add additional cost to all business activities.
Similarly, it is irrational to propose taxes on post office services other than postcards, inland letters, book post and envelopes weighing less than 10 gm, which have cascading effects.
The RBI will be in a bind, and may resort to hiking the repo rate by August to calm the inflationary pressures. The government and the RBI don’t seem to be on the same page.
It’s puzzling why the two projects in Mumbai, virtually stalled by the Maha Vikas Aghadi government for environmental and other concerns, became a priority for the new dispensation despite a court ruling. It seems the considerations are more than ideological. Depleting forest covers have an adverse impact. The floods in the North-East is attributed to felling of trees for various ‘developmental’ projects.
The bullet train project worth Rs 1.08 lakh crore seems a priority for the new Maharashtra government. Now, land acquisition may be expedited.
On the tax front, the government raised taxes on gold to cool off demand. The import duty has been raised to 12.5 percent from 7.5 percent. If the surcharge is added the precious metal effectively comes under 15 percent tax rate from the existing 10.5 percent. The gap between local and overseas prices is more than 15 percent. There may be a marginal fall in imports but historically high duty makes smuggling more remunerative.
About half of the gold imports are re-exported. With an adverse cost competitiveness, India will lose a lucrative overseas market. India’s May trade deficit widened to $ 24.29 billion against $ 6.53 billion in April. The gold imports surged to $ 6 billion from $ 678 million. During May, 107 tonnes of gold were imported.
The new rates will adversely impact banking services, milling machinery for cereals and petroleum products. It would impact family budgets as these cover wider ranging goods like LED lamps, ink, knives, blades, power-driven pumps, and dairy machinery, which will attract 18 percent tax rate against previous 12 percent. Milling machinery for cereals will be taxed at 18 per cent, up from five percent. Tax rates for solar water heaters and finished leather have gone up from five percent to 12 percent. The rate for work-contract services supplied to governments and local authorities are proposed to be increased to 18 percent.
The GST Council allows GoM recommendations on withdrawing exemptions for services such as transport of passengers in business class from airports in the North-east. Hotel accommodation costing under Rs 1,000 per day will be taxed at par with the industry (12 per cent). Hospital rooms, except ICU, with a daily rent of Rs 5,000, could be taxed at five per cent. The hospitality sector hasn’t yet come out of the Covid-19 pandemic induced slowdown.
A cautious but proactive step is the move to impose cess on export of petrol and diesel. The refiners export petro-products at globally prevailing prices. The domestic crude producers sell in the home market at the prevailing international prices and make windfall gains. Certain refiners for purposes of exports keep their pumps in the country dry. To check it, cess of Rs 6 on petrol and Rs 13 per litre on diesel or Rs 23,250 per tonne have been imposed, with the rider that not more than 50 percent of the total crude production can be exported, which also explains cess on aviation fuel.
The states should feel happy at the extension of the GST compensation cess for 14 percent CAGR till March 2026.
The RBI in its 25th Financial Stability Report sees global outlook uncertain and domestic situation, though improving, still far from being in ship shape and geopolitical risks warrant careful handling and close monitoring.
The political situation and price movements would continue to create shaky conditions. The states are still not satisfied with the financial fallout. There is strong ground for the GST Council and the government to reconsider their decisions in the larger interests of the country.
(The writer is a senior journalist. The views expressed are personal.)