Indian tax panel unlikely to favour auto sector tax rate cut - GulfToday

Indian tax panel unlikely to favour auto sector tax rate cut

Tata-Nano

Employees work inside a plant for the Tata Nano car at Sanand, Gujrat. Reuters

India’s goods and services tax (GST) panel is unlikely to approve lowering the tax for the auto and allied components sector this week, as a study has warned of major revenue losses, two government officials said.

A government study, attached to the agenda of a Sept. 20 GST panel meeting, has said the total annual revenue loss could be as much as 500 billion rupees ($6.95 billion), if the panel decided to lower tax rates for the auto sector to 18% from 28%.

Meanwhile, state officials in Kerala, Punjab and West Bengal say they are also opposed to any cut in tax rates in the autos sector, or even consumer goods, because of lacklustre tax collections this fiscal year.

In the April-July period, total tax revenues of 20 Indian states fell 7% to 4.9 trillion rupees compared with the same period last year.

Some states were particularly hard hit, with data showing Andhra Pradesh, Rajasthan and Punjab tax collections plunged 59%, 35.5% and 12.5%, respectively.

“I will oppose any reduction for the simple reason that it won’t be revenue neutral,” said Thomas Isaac, finance minister of the southern state of Kerala.

The auto sector, which has been reeling from the worst slump in nearly two decades, has pushed for a lowering of tax rates at the Sept. 20 GST panel meeting, in a bid to revive vehicle demand.

The GST panel is chaired by the federal finance minister and all state finance ministers are members. The panel makes decisions by vote.

Still, those states ruled by Prime Minister Narendra Modi’s Bharatiya Janata Party may be willing to support a GST cut if the federal government pushes such a proposal.

“In my view, if the centre feels that it is good for the economy, and they will be able to compensate the states, then the states should support the proposal,” said Himanta Biswa Sarma, the finance minister of the northeastern state of Assam.

The GST meeting will be closely watched as it could help investors gauge the government’s seriousness in reviving growth in Asia’s third-largest economy.

Finance Minister Nirmala Sitharaman has in recent weeks outlined a slew of measures to revive investor sentiment and push growth up from a 25-quarter low of 5% in April-June.

But measures such as creating a stressed fund for the hard-hit housing sector, a withdrawal of higher taxes on foreign portfolio investors and planned mergers among state-owned banks have not really helped revive investor sentiment.

Weak growth has also hit the federal government’s direct tax collections, which are showing a 6% growth rate, considerably less than the budgeted 17% growth rate for this fiscal year, while GST collections in August fell to a six-month low.

This, in turn, could make it challenging for the government to meet its fiscal deficit target of 3.3% for 2019/20.

Separately, Indian equities plunged on Tuesday after the weekend attacks on Saudi Arabia oil facilities resulted in the suspension of nearly 6 per cent of the worlds crude production, sending shock waves across global financial markets.

Heightened nervousness was evident on Dalal Street from the sharp jump in the ‘fear index’ -- ‘India VIX’ -- which closed nearly 7 per cent higher.

The sharp sell-off that followed the jump in oil prices, resulted in the Sensex losing 642.22 points, or 1.73 per cent, to 36,481.09. The broader Nifty finished at 10,817.60, down 185.90 points.

The auto sector, already in the grip of a major sales downturn, lost the most on the exchanges. Hero MotoCorp, Tata Motors, Maruti Suzuki India and Bharat Forge Ltd fell in the range of 4 to 7 per cent. Subsequently, the Nifty Auto index finished nearly 4 per cent lower.

“Bank Nifty lost 800 points, which is its biggest decline since August 2019. The sell-off was so harsh that it did not allow any sector to close in the green. Despite weakness in the rupee, the technology sector also lost 0.60 per cent,” said Shrikant S. Chouhan of Kotak Securities.

“Due to the sudden jump in 10 years GOI yield, bonds have compelled rate sensitive sectors to close lower. Nifty Auto, Reality and PSU bank stocks closed sharply lower,” Chouhan added.

Brent crude on Tuesday afternoon, traded at $68 per barrel on the oil futures markets, up 11 per cent over Friday’s close of $60.15 prevailing prior to the attack on Saudi oil facilities which resulted in their suspending production of 5.7 million barrels of crude oil per day.

India imports 83 per cent of the oil it consumes, and a recent report by Kotak Institutional Equities said that the sharp rise in international crude oil prices may require India “oil marketing companies (OMCs) to increase the retail price of diesel and gasoline by Rs 5 to 6 per litre in the following fortnight”.

On Monday, the oil prices jumped to as much as $71 a barrel as investors reacted to the sudden loss of nearly 6 per cent of the world’s daily oil production.

Agencies