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TOI EDIT -Don’t Raise Taxes GST Council should avoid any increase when aggregate demand remains weak

December 18, 2019 05:50 AM


Don’t Raise Taxes
GST Council should avoid any increase when aggregate demand remains weak
The GST Council is scheduled to meet today in the backdrop of a serious challenge. The pronounced slowdown in economic activity has had an adverse impact on revenue collections. Governments however cannot suddenly back away from expenditure promised in budgets earlier in the year. Today’s meeting therefore will explore options to augment tepid GST collections. The scale of the problem is evident from the following data. Gross GST collections between April and November 2019 was Rs 8.05 trillion, higher by 3.7%. In comparison, despite the slowdown, the economy in the first half of 2019-20 grew at 7% without adjusting for inflation.

One measure proposed to deal with the shortfall in collection is to move a number of commodities from a lower tax slab to a higher tax slab. This is a bad idea and should be avoided. The economy has witnessed a slowdown in growth rates for six consecutive quarters. Other data arriving after the September quarter point to aggregate demand remaining weak. To illustrate, retail inflation for merchandise and services has been trending downwards, a sign of low pricing power. In this backdrop, an increase in tax rates will exacerbate problems caused by weak demand.

Instead of tinkering with tax rates yet again, the GST Council should opt for stability. The thrust at this moment should be on cleaning up the processes which have prevented GST from delivering its full potential benefits. Compliance remains cumbersome, particularly for smaller businesses. Separately, refunds to businesses get delayed and so does compensation to states. These are areas which need attention. GST cannot be viewed in isolation. The tax rates have to be in sync with a larger macroeconomic strategy. An increase in rates for a part of the tax base is an attempt to solve an immediate problem without considering the larger consequences of the solution.

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