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India puts GST rate tweaks on hold till it has a grip on inflation

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The goods and services tax (GST) rate rationalisation exercise is likely to be delayed because of inflationary pressure and geopolitical tensions, said a senior finance ministry official as part of comments about the economy, asset sales and the government’s borrowing programme.

The Centre has sought a legal view on the divestment of Pawan Hans and Central Electronics Ltd (CEL) that’s run into complications owing to allegations involving the successful bidders, the official said.

The government will stick to its market borrowing plan as of now and explore other options to raise funds to meet higher food and fertiliser subsidies and loss of revenue due to inflation-containment steps taken over the past few days.

The group of ministers (GoM) set up by the GST Council to review rates is yet to finalise its report.

Most Essentials in 5% Slab

But both the Centre and states agree that it may not be the right time for such an exercise given India’s high inflation. Fewer slabs would mean that GST on some items could go up, which could make goods expensive at a time when consumer inflation has touched an eight-year high of 7.79%.

“Rate rationalisation is difficult with inflation at this level and has to wait till the situation improves,” said the official.

The GST Council is likely to meet in June. It’s expected to take up the report of another GoM headed by Meghalaya chief minister Conrad Sangma that’s reported to favour the highest 28% rate on online gaming, racing and casinos. The council is also expected to discuss integrated GST on ocean freight, struck down by the Supreme Court in a recent order.

The council had set up a GoM last year headed by Karnataka chief minister Basavaraj Bommai to suggest changes to the GST rate structure. It was tasked with suggesting rate changes to correct inverted duty structures and also to reduce the number of GST slabs from the existing 5%, 12%, 18% and 28% to just three.

ET had reported that states don’t favour any changes in rates because of high inflation. Most essentials are in the 5% slab.

Disinvestment

The Centre is studying the Pawan Hans and CEL divestments before deciding on its course of action.

“We are taking a legal view on whether to restart the process or to re-work with existing bidders,” the person said, adding that the government is seeking suggestions from the law ministry.

The government will increase scrutiny over the disinvestment process to avoid similar situations. It will proceed with the planned privatisation of two state-owned banks and try to conclude the process in this fiscal year, which will give it additional resources.

The government has budgeted Rs 65,000 crore from disinvestment in FY23. The Centre will require all the resources it can muster to fund the food and fertiliser subsidy bills, which may exceed the budgetary allocation by about Rs 1.80 lakh crore.

The government will also lose tax revenues due to the recent measures to tame inflation. The Centre on Saturday announced a cut in excise duty on petrol and diesel that is expected to cause a revenue loss of about Rs 1 lakh crore a year. The reduction in import duties on inputs for steel and plastics and scrapping those on certain edible oils will also add to the revenue loss.

Borrowing Plan

Officials have indicated that the government will stick to its borrowing target for FY23. It may tap other resources to fund the budget and even borrow from the Consolidated Fund of India with the permission of parliament to continue with its infrastructure spending programme, a cornerstone of its recovery plan.

“We have discussed the revenue implications and may go for other resources, including borrowing from the Consolidated Fund of India,” the official said, adding that the Centre is not going to cut back its budgeted ₹7.5 lakh crore capital expenditure for FY23. Sources in the finance ministry had indicated that the Centre may require additional borrowing of ₹1 lakh crore.

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