GST relief for auto companies may raise burden on other goods

Amid intense lobbying for a reduction in goods and services tax (GST), the government is expected to send a message that a tax cut is only possible if the compensation cess on luxury and sin goods such as tobacco, soft drinks and cars is increased or its coverage is expanded to include more products. Alternatively, states will have to forgo a part of the compensation from the Centre for any “revenue loss” since the kitty is already stretched.

As part of the grand GST bargain, the Centre had agreed to compensate states for five years, if the annual rise in revenues was less than 14%. The law provides for payment of compensation only from a fund where the cess flows. While the Centre has budgeted to collect close to Rs 1-lakh-crore cess on sin and luxury goods during 2019-20, or around Rs 8,000 crore a month, the mop-up in August was Rs 7,273 crore. So, there is a possibility of lower than budgeted collections.

In contrast, for the first four months of the year, the Centre has released Rs 45,784 crore as compensation to states. If the average of around Rs 11,000 crore a month continues, the Centre will have to release over Rs 1.3 lakh crore to the states during the year and is staring at the prospect of holding back compensation for the last three-four months of the current financial year.


Officials said lowering GST for automobiles and auto components could leave a hole of Rs 55,000-60,000 crore if the tax is lowered from 28% to 18%, sources told TOI. This will enhance the compensation burden for the Centre, which will have no option but to either increase the current level of cess or broadbase it to include more goods and services.

Several industry groups — including those representing the auto sector, textiles, manmade fibre, biscuits and segments of the FMCG space — have been lobbying with states to demand for a rate reduction at the GST Council meeting on September 20. Their argument is that a “revenue loss” or collections growth of under 14% will have to be made good by the Centre. “There are no free lunches. States have to decide if they want to forego compensation or vote for higher cess on existing products. Else, they need to ask someone buying a bar of soap to pay more through a cess to compensate the auto industry,” said a source.

Sources said even legal opinion suggests that the Centre can only make good “revenue loss” through a cess. A change in the cess may also entail amendments to the law governing compensation. While the auto industry has been engaged in a high-decibel lobbying for a rate reduction, officials have refused to accept the demand, citing the enormous burden and weak fiscal position. Besides, they have argued that lower duty alone does not translate into higher demand.