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Will increase in GST rates bring Inflation??

  1. The GST Council, at its meeting next week, will consider multiple options to boost revenues such as more items under cess and the restructuring of rates.
  2. This is going to be first meeting to consider an increase in GST tax rate.
  3. To impose cess on more items would not be difficult as this levy is imposed on items in the highest 28 % slab, which are considered as luxury or sin goods.
  4. Council has asked the officials from states to come up with suggestions on rates, the cess on various items.
  5. This suggestions will be reviewed at the upcoming meeting.
  6. However, increase in GST rates could create a situation of panic and lead to economic instability.
  7. The council highlighted the fact that proceeds from cess levied on items such as tobacco and automobiles, will not be sufficient to compensate the states for any shortfall in revenue.
  8. Compensation cess proceeds, levied on luxury and sin goods, used to reimburse states for any losses incurred in the first 5 years of GST.
  9. At present, States have complained they have not received the compensation cess from the central government, which is impacting their finances.
  10. After two months of negative growth, GST revenues witnessed a recovery with collections rising 6 % in November.
  11. Even after that, GST revenue during the year are still below estimates.
  12. The government has tried all the options to raise revenue but the government’s move to raise GST rates could push economy into recession.
  13. After giving corporates tax, a break, which cost economy of around ₹1.45 lakh crores, the government estimated that raising GST rates would bring in an extra ₹1 lakh crores in a year.
  14. Finance Minister Nirmala Sitharaman indicated that they are considering to reduce income tax rate in the upcoming budget. 
  15. An increase in GST rates may be necessary considering the fact that state government might take legal action against centre over non-payment of due compensation.
  16. The monthly compensation bill due to state would cross ₹20,000 crores in the coming months.
  17. This could push government into fiscal deficit.
  18. The government might not complete it’s fiscal deficit targets this year unless the government lowers their expenditure.
  19. As we move forward, We can expect spending cuts across other schemes.
  20. The government is under stress and now seems to be trying to recover this shortfall in direct taxes by raising more money through GST.
  21. Currently, Agriculture grown about 2 %, no real increase in rural wages and 0.1% negative growth in the industry.
  22. Raising the base rate from 5% to 9 to 10% would be big trouble for middle class people as branded atta and even hotels that cost ₹1000 per room-night will come under a higher GST bracket.
  23. This would mean that consumption of goods and services would cost more.
  24. The Finance Minister tried to relax situation by reducing Corporate Taxes and promised more jobs only when consumption revives.
  25. So everything might get little expensive for a while with no effective solution of raising economy.
Author: Niranjan Reddy

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