Even as expectations of a rate cut in GST for automobiles has gained traction in the last few days, cracks have emerged within the GST council with states like Kerala, Maharashtra, Haryana and West Bengal opposed to the idea of GST cuts for fear of losing revenue in run-up to assembly elections. Lower GST revenue could mean lesser leeway in their hands to offer sops to electorate in election year.
The automobile industry that accounts for 49 per cent of the country's manufacturing GDP is in the midst of an unprecedented crises with overall sales declining by 14 per cent in this fiscal so far with the passenger vehicle segment posting a near 22 per cent drop. The industry has been clamoring for a 10 per cent GST rate cut before the onset of festive season to tide over the crisis. While the demand has found favourable reception with the Centre--Finance Minister Nirmala Sitharaman, her junior minister Anurag Thakur and road transport minister Nitin Gadkari, are all seemingly open to the idea of a rate cut--some of the states are not agreeable to take a hit on their revenues.
"I don't support the idea (of reducing GST rates) at all. The central government can afford to lose revenue but we cannot. They should go for expansion of fiscal policy," Kerala Finance Minister Thomas Isaac had said earlier this week. "Do you think demand slowdown in the auto sector is because of higher tax? The tax rate has been reduced so much. It has been reduced to 28 per cent. I don't believe this argument."
Poll bound states like Maharashtra and Haryana where state elections are due to be held between October and November this year, and West Bengal where elections will be held in early 2021, are also opposing it. At the same time, Tamil Nadu, that was earlier also opposed to a rate cut, is now agreeing to it. The state has one of the biggest automotive hubs in the country around Chennai, which is also adversely impacted by the slowdown.
"It is a trend in India that state governments dole out sops before elections and that requires money. So the reluctance on their part to forego revenue, even if for the short term, is not surprising," said a senior official in a top auto firm. "The need of the hour is for Centre to show its leadership and get them on board. Everybody gains if the economy turns around."
The GST Council comprises of 33 members currently with all the state finance ministers alongwith Sitharaman and Thakur. Till date 36 meetings have been held and all decisions have been taken unanimously. Thakur on Friday suggested that centre would like to arrive at a consensus with the states on this issue as well and urged the industry to also lobby with the state finance ministers directly.
"We are open to taking it to the Council but most decisions there are taken unanimously. I would like the industry to reach out to individual state finance ministers who are also part of the GST council," he said.
The uncertainty over the rate cut has put the industry in a tight spot. Dealers across the country said they are witnessing significant postponement of purchases by potential customers in anticipation of a reduction in prices post the rate cut.
"In order to get out of the current crisis and not miss the festive season, we require clarity from the government, here and now, on GST and scrappage policy," said Guenter Butschek, managing director and CEO, Tata Motors. "If the government does not believe, for whatever reasons, that it will not be able to reduce the GST, then actually let us know it here and now, loud and clear. Because that's the customer expectation at this point of time, and it's the reason why we currently see lots of cancellations of bookings. Why we actually see empty showrooms is because of the fact that customers expect there is a better deal coming, if not tomorrow then after September 20."