Quick Take | GST rate cuts try to be pragmatic, populist and helpful to some industries

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The GST Council has decided to cut tax rates on a number of goods and a few services. While the notional revenue loss has been pegged at Rs 5,500 crore, the government will hope that better compliance and consumption growth can compensate for lower rates.

The rate cuts are likely to fall short of the Street’s expectations, as rates on goods such as cement and some auto parts that were in the highest 28 percent slab were not reduced.

There was political messaging that was visible in the rate cuts. Taxes on walking sticks were cut from 12 percent to 5 percent, a nod to senior citizens who form an important vote bank. Similarly, the movie tickets above Rs 100 and below that will continue to be taxed at different rates. Also, taxes for televisions were lowered but only for screens up to 32inches. With elections around the corner, the government will be keen to reiterate that it’s on the side of the common man.

Let’s look at some of the main rate cuts

The multiplex industry will be happy with the reduction in GST rates, from 28 percent to 18 percent on tickets above Rs 100 and from 18 percent to 12 percent on tickets below Rs 100. Since most tickets in metro locations are above Rs 100, the reduction will benefit them. The rate reduction from 28 percent has been a long-standing demand of multiplex operators. They will eventually benefit from lower taxes, although initially they may have to lower ticket prices to pass on benefits to consumers. Listed companies such as PVR and Inox Leisure should benefit.

In auto components, those falling in one category HS Code 8483, comprising transmission shafts, gears and gearboxes have also seen rates decline from 28 percent to 18 percent. This will benefit companies although the net benefit depends on how much input tax credit is being availed.

The government has also clarified on the taxation on supply of renewable energy plants, including solar power plants. While the devices and parts used to make these plants were taxed at 5 percent GST, since these plants may be set up as part of a comprehensive contract, disputes arise on the levy of tax. Thus, the tax could be 5 percent or 18 percent leading to confusion. Now, where there is an engineering services contract to set up a renewable energy plant, 70 percent of the gross value will be treated as goods with a 5 percent tax and the rest will be treated as services. This will lead to a more certain tax regime for such projects.

Although the breadth of cuts may have disappointed some, the government could introduce one more round of tax cuts when the interim budget is presented.

Among the decisions of the GST Council, the rate cuts may have got all the attention, but the setting up of a 7-member group of ministers merits equal attention. GST revenues have been falling short of original estimates, especially in some states, and this GoM has been tasked with finding out why. While the process may take time, it could set the stage for some structural changes to the GST superstructure.

It is this shortfall in revenue that is staying the government’s hand from taking up a bolder rationalisation of tax rates.