By Prarthana Mitra
The government has decided to lower the tax rates for construction material in the coming months, to reduce the burden of Goods and Services Tax (GST) on manufacturers. Cement and paints continue to incur the highest GST rate of 28%, bringing an economic slowdown in these sectors. This has in turn adversely impact job generation, which the Narendra Modi led government hopes to correct in the run-up to the 2019 general elections.
GST inverts the duty structure in certain sectors
The agenda to lower GST on cement, a key ingredient for the infrastructure sector, has been on the table since November 2017. However, the GST Council shattered all hopes of the construction industry by not giving into their expectations of a tax cut. While that move is now in the offing, some may say it comes a little too late, especially after the levy has already seared a Rs 20,000 crore-shaped hole into the sector.
The same problem is faced by a number of other products where inputs incur higher levies than the final product, such as textiles. This creates an inversion in the duty structure and manufacturers often complain that the levies are not fully refunded.
When will the GST stabilise?
The initial plan, following the implementation of the GST, was to keep the rates as close to the prevailing levies (excise and state VAT). However, it was a nominal reduction and last year, the government had slashed taxes on 176 items from 28% to 18%, leaving only 50 items in the highest slab.
According to a Business Line report from May 2018, the council may also look at cutting the tax rate on some white goods and automobile parts manufactured in the small-scale sector. Taxes may also be reduced for several items that attract high GSTs due to their intrinsic value but do not generate a lot of revenue for the government.
The goal is to eventually merge the 12-18% brackets while keeping as few items as possible in the 28% slab, but the finance ministry has not made good on that promise yet. In an interview earlier this week, finance secretary Hasmukh Adhiaany said any immediate merger of slabs was unlikely until revenue collections were more stable.
Prarthana Mitra is a staff writer at Qrius