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Alternatives to GST rate cuts

  • Aug 5, 2020 | Divita S Gupta

Alternatives to GST rate cuts

The Coronavirus crisis has pushed trade verticals across India in a state of panic as the nationwide lockdown is adding to the already existing burden of an overall economic slump. While the Centre announced several measures to help businesses, especially MSMEs, get through this economic mayhem, the demand for rate cuts and exemptions under the Goods and Services Tax from various industry bodies has never been more profound.

The 40th GST council meeting that was held last week had bleeding businesses glued to the news, but as expected, there were no announcements of rate cuts or exemptions under GST. This is probably because experts agree that rate cuts or exemptions under the Goods and Services Tax are never a good idea, especially in the long run. In fact, rate cuts can lead to dwindling tax revenues for both Central and State Governments, higher compliance issues for taxpayers, increased cases of anti-profiteering and at the end, there are no guarantees that the benefit of the rate cut would actually reach the consumer. What are the possible measures or reforms that can be implemented as alternatives to rate cuts?

Bringing more goods under the GST purview

When the Goods and Services Tax was first implemented in India in July 2017, five significant commodities were left out of its purview viz. crude oil, natural gas, petrol, diesel, and aviation turbine fuel. The Oil and Gas ministry had even pitched to bring natural gas under the GST radar, mainly because it was still under the Value Added Tax (VAT) regime and was being charged from a range of 3% to 20% across States. The ministry had opined that a uniform tax levy could encourage the use of natural gas across States. If the Centre considers expanding its net and brings commodities like oil and gas under the purview of the Goods and Service Tax, there could be a significant increase in revenue.

Implementing a Corona tax on goods that make consumers vulnerable to COVID-19

The State Government of Delhi, in a bid to reduce crowding around liquor stores imposed a Corona tax of 70% on the sale of liquor. This special Corona tax inspired several other States to impose similar taxes on alcohol purchases in their State. Recently, health bodies as well as economists have urged the Centre to impose a Corona cess on the sale of tobacco-based products like bidis, cigarettes and vaping devices and accessories. These bodies are of the opinion that smokers are vulnerable to contracting COVID-19 as their lungs are weaker in comparison to non-smokers. A Corona cess levied on tobacco-based Goods is projected to generate a revenue that will equal nearly 29% of the monies required to fund the nation’s Atmanirbhar Bharat Abhiyan.

GST Payments as Capital

In April this year, Finland offered VAT loans to businesses enabling them to apply for a temporary refund of VAT payments made on returns that were furnished this year on a nominal interest rate of 3%. India could take a leaf from Finland’s book and introduce a deferred GST payment mechanism under which the GST collected by a business could be considered a short term loan and be used as working capital to help struggling businesses stay afloat.

Other recommendations that have been made by experts much before the Coronavirus crisis include rationalising and restructuring the tax slab system and cutting down on the number of slabs (like Singapore), setting up dedicated GST relationship managers and speeding up the refunds process.

Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Divita S Gupta
Avalara Author Divita S Gupta
Divita has served as a writer and editor for top financial services organizations in India. She has written on topics like mutual funds, insurance, taxes, SME financing for globally recognized banking and financial organizations including ICICI, Aditya Birla Group, News Corp. With a Masters in Business Administration from Symbiosis International University, she currently owns a small business in Mumbai.

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