GST demands ignored, but will corporate tax cut push consumption?

In clever optics, Finance Minister Nirmala Sitharaman chose to announce the largest ever cuts on corporate tax right before the crucial meeting of the GST Council on Friday (September 20).

As the markets cheered this unprecedented bonanza for companies big and small and experts began exulting over the hugely positive impact these announcements will have on India Inc’s profitability amid the current slowdown, the impending GST Council meet and the significant decisions it was to ponder over were virtually forgotten.

So when the GST Council announced a hike in rates for some categories including caffeinated beverages and a reduction for some others including hotel rooms, ignoring the intense lobbying by bigger sectors for rate cuts, the general response to these decisions was rather muted.

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The automobile sector, facing a persistent and worsening slowdown in sales for 10 months in a row, had been seeking a massive cut in GST rates by 10 percentage points. Others such as biscuit makers had also petitioned the government for a rate reduction, at least for low priced biscuits. But the GST Council chose to ignore these demands, given revenue constraints of the state governments as well as the Centre.

While there has been some growth in GST collections each month of this fiscal over the previous fiscal, it has not nearly been given enough Budget revenue targets. In two of the five months this fiscal till August, GST collections have fallen short of the ₹1 lakh crore per month target. In August, the collection was ₹98,202 crore while in June it was ₹99,939 crore.

Between April and August this year, cumulative GST collection has grown by just about 6%. Since direct tax collections have also been growing much slower than the budgeted target and the corporate tax concessions announced yesterday will further constrain the fiscal math, it is no surprise that the GST Council opted for only minor tinkering of rates for sectors which have minimal revenue implications.

Analysts at brokerage Anand Rathi pointed out that the fiscal stimulus expected in the form of a cut in the GST instead came as a cut in corporate tax. “A GST rate-cut would have benefited consumers directly and companies indirectly. The move would have required concurrence of state governments in the GST Council. Government’s move, therefore, could be seen as an effort to avoid such complications,” they said.

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“Yet, if government wanted to primarily boost consumption, a cut in personal income tax would have been the choice (and more populist measure). The choice of corporate tax, therefore, suggests that the prime objective is to boost domestic investment and attract foreign capital. Also, this move comes when the corporate-profit-to-GDP ratio in India is falling and has scraped an all-time low of less than 1%. Today’s policy can boost GDP growth by up to 30bps through a spurt in investment and the multiplier effect,” they added.

Meanwhile, some experts have warned that while such significant (at least 10 percentage points for all companies and almost 12 percentage points for those setting up new manufacturing facilities in India) corporate tax cuts are welcome, they would do little to spur consumption. But a cut in GST rates for large volume sectors would have had some effect on consumption. And while there is some talk of companies effecting select price cuts after the corporate tax cuts announced yesterday, this is neither certain nor will it be done in any significant manner to affect domestic consumption.

Analysts at brokerage firm Edelweiss echoed the sentiments of those at Anand Rathi, wondering whether the corporate tax rate cut will be sufficient to turn the business cycle around. “A lot depends on the government’s fiscal stance and the global environment. The current constraint on the economy is aggregate demand shortfall in our view, whereas today’s measures amount to supply side push. Hence, it is possible that, in the near term, part of the tax bounty finds its way into savings instead of being spent (tax-cut multiplier tends to sag during downturns). Furthermore, if the government chooses to rationalise spending, it will certainly diminish the fiscal impact.”

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So should the GST Council have considered lowering rates for key sectors to boost demand? The automobile industry had pinned hopes on a cut in the GST rate from 28% to 18% but will now have to manage without this concession. Currently, the total tax levied on automobiles (excluding tractors) ranges from 28-50%.

According to analysts at Kotak Institutional Equities, cars running on petrol/CNG/LPG with 1,200 cc engine displacement as well as large diesel cars with 1,500 cc engine are taxed at a total levy of 50%, of which 28% is GST and 22% is cess. Smaller diesel cars are only marginally less taxed, at 48%. The lowest total tax incidence in the automobile segment is 28%.

A GST rate cut was seen having a positive impact on financials of vehicle manufacturers by increasing sales as retail prices would have declined and by improvement in the EBITDA margin of manufacturers.