Do you think with help from GST, real GDP growth in FY26 could be higher than estimated earlier, at around 7%?
I can’t say it now. It will take a couple of months after (reformed GST) is rolled out from September 22, for one to estimate the additional demand created. There could be an immediate splurge, and then by January or so, (the uptick in consumption) might stabilise.
What kind of measures are you planning to take in order to make sure that the “revenge buying” continues?
We are reducing the tax on most items that are periodically consumed by people. These are items purchased in a recurrent manner. So that itself will ensure the cycle will continue. Also, if a car is bought by a household maybe once in 15 years, there could be more people who can buy a car now.
Many economists including former chief economic adviser Arvind Subramanian feel the net revenue impact of lower GST rates could be much higher than the official estimate and could last longer…
I am not saying (the revenue impact) will be offset immediately. But largely, the net revenue loss of `48,000 crore that we have estimated should get offset in the current financial year itself. I have stated my number, but will have to keep my fingers crossed about how long it takes (for the hit to be fully neutralised). In India, there is also a cycle for purchases. As soon as the crop is sold off, rural purchases get a leg up. Similarly, the festive season often sees higher consumption both in urban and rural areas.
West Bengal chief minister’s principal adviser Amit Mitra has alleged that eleven states demanded “compensation for revenue losses”, but their voices were muffled…
They spoke for three rounds on it in the GST council last Wednesday. I was willing to sit for the whole of the next day too. The members then decided to finish the agenda on Wednesday itself, despite the original two-day schedule. It wasn’t my call. So, who’s muffling whose voice?
We are sure the compensation cess can’t continue, and this has been explained to all in the council very clearly. In fact, legally, we cannot (extend the cess).
Some proposed an amendment to the law. But one must go back to the origin of and the original intent behind the cess. It was a levy that came on top of the 28% tax on some (demerit and luxury) items, and was meant to provide guaranteed revenue to states in the initial five years. So you have taxed people more to get states their protected revenue. Is that a sustainable approach, and can it be in sync with a package meant for an across-the-board tax relief?
Are those voices, which he says are muffled, telling that, “no, you may come with a tax proposal across the board to give relief, but we want revenue for the states, or a particular state, and therefore put a cess on people?”
I am going with the philosophy of giving money to the people so that the economy can get lubricated, and as a result, more taxes can be collected. You have leaders who used to say it’s a “Gabbar Singh Tax”, but now the very same people want the GST Council to do a “Gabbar act” now, because states want more money!
At the root of the states’ concern is the GST’s inability to yield the promised revenue productivity. Some states are worried that after the sweeping GST reductions, they may not have the required revenue. Do you think the states are failing in their tax effort?
No state had reported annual revenue growth higher than 10% in the pre-GST period. In fact, there were only two states whose tax revenue growth was 8-8.5%, and others reported lower figures. Despite that, when GST was introduced, former finance minister Arun Jaitley came out with the formula of 14% assured growth to protect states’ revenue and got them on board.
An item on which excise duty was collected by the Centre was brought under the cess. So, when states say we forfeited so much, the Centre did too, and instituted a cess, the proceeds of which went to the states exclusively.
The compensation cess distribution is also telling. To take an extreme example, one state collected more than Rs 80,000 crore as cess, and could lay its hands on just 50% of that amount; another state collected Rs 969 crore, but got Rs 2,000 crore as compensation.
Is this a formula which all of us would like to continue with?
A distortion, which was brought into the system had its own lifetime
of five years, and it’s over. Now you can’t refashion it again or amend the law to bring it back. It will amount to burdening the people. Distortion breeds corruption.
Insurance companies are saying that GST exemption, instead of zero-rating, may harm their balance sheets as they will not get input tax credit…
There are still many insurance portfolios, which are left for them to take the input tax credit. We have brought the tax down on the sector after paying heed to people’s voices. There are many manufacturing sectors wanting to have input tax, because the circle of the business earnings are such. So, if they (insurance companies) have such serious problems, they should voice it.
Several consumer companies are saying that the window available to them is too small to carry out changes in MRP, etc. Is the Council open to giving them some extra time?
The decision has been taken. The GSTN and its systems are all being worked up to bring in the rate changes, and the time given for them is 20 days. From the time the Council has taken a call, the Central Board of Indirect Taxes and Customs has been working with all the distributors, the vendors, and indicating the schedule to them. Even prior to the GST Council, the board has spoken to them.
Detergents and liquid soaps have been left out in the current rate rejig..
The idea is not to cut the tax on everything. We looked at this from the point of view of daily household items that are important for the middle class and poor, farmers and MSMEs. In the process, many items would remain where they are. Yet, more than 375 items saw a reduction in the rate. In fact, 99% of all goods in the GST and services are now either in the zero or 5% or 18% bracelets and just 1% of items attract 40% tax.
Will there be a monitoring mechanism to ensure that tax cuts are passed on?
I will personally monitor it from September 22, get inputs from the district level, associations, MPs etc. Once the information reaches us, we will engage with those who have not passed on the benefits to the consumers. We are engaging with the industry to ensure that they give a commitment in this regard.
The statement that you will be keeping a watch can create a fear factor…
Let it be. If you do the right thing, why will anyone watch you? if you don’t, of course, you will be made accountable.
A company may announce price cuts, but at the retail level if it is not passed on…
We have to wait and see who’s not passing. I want to go based on trust. I want to go based on confidence that they will do it. I can’t, from day one, say, I suspect they won’t pass it on. I can’t do that. Many of them have come forward to say, yes, we will transmit. I’m sure that will be a motivation for the others as well.
Despite the GST reforms, bond yields are rising, likely due to concerns that the government may borrow more…
Nothing changes in my borrowing calendar. That should reassure all. The Reserve Bank of India has announced that it’s now going to open up the window for releasing more money into the economy. I am sure things will balance out.
Are you disappointed with the stock market’s response to the GST reset?
Stock markets have so many other considerations. Every time, it’s not just one factor that plays out there. The global challenges are big and getting bigger and more unpredictable by the day. So, obviously, the market takes all these factors into consideration, rather than just the one huge thing (GST), which has happened in India.
Do you plan to address the key structural issue by bringing petroleum, electricity, and real estate under the GST during the tenure of Narendra Modi 3.0 government?
It’s a question that needs to be asked to the states. The initiative for this has already been taken by the Centre and the Act has been kept ready. Once the states come forward and say at what rate the petroleum products will have to be taxed, those will be fitted into the law.
If you impose an additional levy on sin goods over and above the 40% GST to retain the tax incidence on them, will it be collected and appropriated solely by the Centre or be shared with states as well?
The GST Council handles issues which are within its purview, and the highest rate available (for GST) is 40%. There is nothing more the GST Council has to discuss or take a decision on.
Process improvement has been a major element of the current set of GST changes, apart from the trimming of slabs and tax rates. A pending issue is companies with operations in more than one state, requiring multiple registrations, usernames and passwords.
You may have offices in different states, and your registrations can happen in each of them, but the central or main place of business registration is the one which will have to be taken into consideration. That step has already been brought in, and it has got the GST Council’s approval.
Why should the government do the heavy lifting for years on as far a capex is concerned? The private sector, which benefitted from corporate tax cuts way back in 2019, is still not investing enough..
At some point in time, I heard some of them (companies) say that they are not able to see demand going up, and that unless demand convincingly goes up, they won’t be able to invest and take a downside risk. But now with the GST reforms, even that question should be answered. A pick-up in demand will be obvious now, so hopefully they should come out (and invest more).
The RBI has cut policy rate by 100 bps so far in 2025, but the average lending rate in the banking sector has gone up. Credit flow has to happen. Are the banks just protecting their margins?
We are having a review meeting with banks next week. But market corrections also happen, and it’s not always necessary for the government to interfere in these things. But I’m not leaving it at that. I will certainly be checking up on what’s happening with the (banking) industry. But corrections don’t have to be triggered by the government all the time.
Even home loan rates have gone up…..
That may not be completely true. There are many who have come to me to say they have messages from their banks about reduction in home loan rates.
Is the government planning to extend liquidity or credit guarantee support to the US tariff-hit sectors?
Something is being worked out, but the reason why we cannot arrive at something immediately is because we should have a sectoral understanding of the impact of the 50% (US) tariff. That assessment by sector, unless it is ready, will be too much of a shot in the dark for the government. Engagement by different departments and ministries with the stakeholders is on. It is for them to give us an (estimate) of what has been hit on them after the 50% tariff kicked in from August 27. Let those numbers be known.
GST cuts will help to a certain extent, but the government of India can, a lot of people are saying, use this crisis as an opportunity for more reforms….
Reforms have never been on the back burner. Even during the Covid period, we undertook reforms. For prime minister (Narendra) Modi, reforms are never a secondary issue, and are always at the top. But of course, in the last few years, the situation has been such that we could not move as fast as we expected to. . Reforms will continue.
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When it comes to reforms, a key issue is how to correct the market concentration in various sectors. Economic activities need to bemore broad based to lift thepotential growth (which hasapparently fallen).
Concentration of industries, or the small industries not coming forth, are all consequences of business decisions. We can only create the ecosystem so that they feel a bit more assured. The government cannot interfere in the business decision like the way socialist India did. That era is gone. Businesses have to take a call as to when they want to come. There is, however, a clear indication that more has to be done by the private sector, and the government can’t do the heavy lifting alone. You can, at best, nudge them, but at the end of the day, it’s a commercial decision. I can’t put the arguments onto a Board and say, you take up all this way; they (boards) are all professionally managed.