When the GST Council held its 23rd meeting in November 2017, the subject before the members was rationalisation of tax rates across over 200 items. That meeting ended with a recommendation to cut all but 50 items from the 28% top slab to something more manageable, with rates on some other goods dropping to nil. The council also met in January 2018, and again the topic was rate reductions and rationalisation, this time of certain farm goods that had been left out of the loop during the previous round of cuts. Those cuts have now taken effect, and the initial returns from some of India’s key industries are positive.
Farm Tax Rationalisation
One of the key issues before the council in January was farm taxes. The November meeting had led to a few rate reductions for various farm goods, such as ammonia and phosphoric acid-based fertiliser. This item dropped to 5% in an apparent effort to spur growth in the agricultural sector. This was a welcome development, as India’s farm sector has been projected to shrink to just 18% due to decline in various cash crops. One glitch in the plan was that, while fertiliser was now cheaper to buy, it was no cheaper to produce, since the GSTN was still taxing ammonia and phosphoric acid, two key components of fertiliser, at the previous 18% and 12% slabs, respectively. This created a large backflow of unused GST credits in the system and drastically reduced the revenue flowing to the government as a bottleneck developed.
Clean-Energy Tax Cuts
The GST Council has usually been quick to signal support for clean energy with rate reductions and tax credits for wind, solar, and other clean sources of power. Electricity itself isn’t taxed under the GST regime, but a few quirks remain in the system. Renewable energy certificates, for example, are a financial tool for investors in the clean-energy sector. Under the current scheme, electricity is untaxed, and producers have a very generous tax plan for generating it, but the initial investment is still taxed at 12%, which industry watchers say is slowing potential growth.
GST as a Tool for Stimulus
What all of this points to is that the GST is more than a national tax reform. It’s also a tool for spurring investment and growth in certain favoured sectors of India’s economy. Whether it’s rate reductions to farm taxes, reductions in the cost of solar panels, or a combination of the two, as with the nil rate on water-saving drip irrigation systems, the GST Council has tremendous leverage over India’s industries.
That power to spur or discourage growth in various sectors is part of the reason the government adopted the GST structure in 2017. It’s also a source of concern when minor oversights, such as the disconnect between no-tax fertiliser and mid-range rates on fertiliser components, create an irrational set of incentives in what was once India’s key economic sector, and one that 70% of Indians still depend on for subsistence.
The GST rate structure gives the council immense power to drive or inhibit growth in the economy. Not all sectors have been fully rationalised yet, but the council keeps meeting to iron out the little bugs as a spur to continued growth.