GST revision may benefit realty, infra sectors

A hint by Prime Minister Narendra Modi to bring 99% of items under goods and services tax (GST) to 18% and below could see rate rationalisation in sectors like cement and other building materials and premium electronic goods.

Most GST experts said this is most likely to give a boost to these sector but could adversely hit government revenues.

"The movement of more items from the 28% slab to the 18% slab would be positive for many businesses and reduce prices; however the resultant dip in collections could be a matter of concern," said M S Mani, partner, Deloitte India.

An informal survey by DNA Money shows the items in the reckoning for GST rate reduction were cement, granite, marble, television (more than 20 inches), air conditioners, dishwashers, video games, digital cameras (other than CCTV), monitors, projectors, etc.

Those that could be left out were paan masala, tobacco products, aircraft, yachts, guns, pistols, automobile, automobile parts, aerated beverages, etc.

So, if the decision-making body for GST related issues – GST Council – decides to act on the PM's suggestion, close to 80% of the products currently in the 28% bracket could be brought to the 18% bracket. Interestingly, close to 97% of the products covered under GST are already at 18% and below. Modi is looking to bring 2% more in the lower three brackets – 5%, 12% and 18%.

With just 20% of items left in the 28% slab, many expect the government to gradually move towards slab rationalisation.

"As an intention and direction forward, it would be a very significant decision. It would mean we are moving towards 18% as the main rate of GST in India and maybe some time in the future, the multiple rates that we have will go away. In most countries, GST is normally one rate or maximum two rates, but we have four rates," said a tax expert with a leading consultancy firm.

Suresh Kumar Rohira, partner, Grant Thorton India LLP, said going by the products likely to be affected by the latest rate reduction, demand and consumption scenario is not likely to change drastically.

"Unless there is a radical change in FMCG (fast moving consumer goods), textile and real estate sectors, we will not see demand or consumption altering significantly. Textile and real estate are two sectors where money is stashed away. Unless, there is a radical change we will not see the economy booming," he said.

Another GST expert, who did not want to be named, said reduction in GST on cement and other building materials is likely to benefit the real estate sector and government projects.

According to him, the government, which is a major consumer of cement, is likely to save major costs on infrastructure projects due to the rate reduction on cement.

"It will be a big boost for real estate sector and government projects. In recent times, the government has announced major infrastructure projects like metros, dams, canals and others. Today, the government is one of the largest consumers of cement in the country. They are paying 28% GST and do not get (input tax) credit. So if the GST rate is brought down, infrastructure project cost will come down. That will be a national saving. It could help government prune its expenditure," he said.

Grant Thorton's Rohira, on the other hand, estimated further rationalisation in GST rate could bring down government's annual GST collection by Rs 50,000-100,000 crore. GST collection, on a yearly basis, is likely to move up from around Rs 8.5 lakh crore to around Rs 12 lakh crore.

"They (GST collections) have been inching towards Rs 1 lakh crore per month. Now, if there is a rate reduction on certain items there could be some reduction in collection as well," he said.

The Grant Thorton indirect tax consultant sees it as a political compulsion for the government with the approaching generation election.

"Indirect tax collection from Rs 8.5 lakh crore under the earlier regime to Rs 11.5-12 lakh crore is a good jump. From Rs 70,000 crore per month to Rs 90,000-95,000 crore, which is an increase of Rs 20,000-25,000 crore per month is a good fetch," he said.

Rohira did not see liquidity or cash-flow situation for the businesses significantly improving due to rate cut unless the refunds were expedited.

The expert, who spoke anonymously, said a drop in revenue collection could widen the fiscal deficit, which has been budgeted at 3.3% of the GDP for the current fiscal.

He, however, said any dip in revenues due to a possible slash in GST rates could be more than made up by "increased volumes".

"If your reduce rates, volumes pick. And increased volumes more than compensate for the revenue loss. Generally, when the rates come down it is always the timing issue. The first 2-3 months, it (revenue) goes down and then it starts stabilising," he said.

Any revision in GST rate will have to be approved by the GST Council, comprising central and state finance ministers and finance ministry officials.