Monday, August 8, 2022

Economy, politics fluid High GST, levies on gold, banks shoot up prices

Shivaji Sarkar

The economics and politics are becoming difficult. If the change of government in Maharashtra is for an ideology, how Arrey Colony metro depot and a water project take precedence over everything else to get a clearance. Similarly higher taxes are known to spurt rising prices, but that is how the GST Council and the direct taxes board decide to raise the rates on many items, a repeat of what was done in January even as wholesale price index touches 1588.
It is perhaps difficult to understand how the GST Council can take decisions that have obvious impact on the overall price situation. In January too the rates on critical textiles, handloom and shoes were raised 5 to 18 percent. Now the Reserve Bank, SEBI works are defined as services and brought under tax net. Even a cheque book normal for a banking transaction invites taxes of 18 percent. It means each transaction would have huge additional cost. Cumulatively these would have severe cost increases on all business activities.
Similarly, it is irrational to propose taxes on post office services other than postcards, inland letters, book post and envelopes weighing less than 10 gm to be taxed. Each such move has cascading effect on the price situation.
It must have foxed the RBI, which is engaged in keeping inflation low. It will again resort to repo rate rises by August. The chain is likely to continue as the government and the RBI are apparently not on same page.
It puzzles one to realise why the two projects in Mumbai were virtually stacked by the Shiv Sena Aghadi government for environmental and other concerns become a priority despite a court ruling. Is the present government right or was it the previous government? It seems considerations are more than ideological. Apart it seems these have been taken up as exerting ego issues. Removing forests have its impact all over the country. The recent marooning of large tracts in North-East is ascribed to felling or trees to various ‘developmental’ projects. People’s representatives need to show more concern on such fragile issues that affect everybody’s lives.
Yes, another issue certainly is the bullet train with stake of over Rs 1.08 lakh crore investments. The Aghadi government had virtually stalled it. Now it may again see an acceleration of land acquisition. The change of government is possibly to restart such projects.
On the tax front, a crucial government decision is to raise the taxes on gold to dampen its high demand. The import duty is raised to 12.5 percent from 7.5 percent. If the surcharge is added precious reaches effectively 15 percent from the existing 10.5 percent. The hike has raised the gap between local and overseas prices to more than 15 percent. There may be marginal fall in imports but historically high duty makes dubious paths of smuggling more remunerative. No amount of policing could stop that as the once zero duty on gold did.
Yet another business aspect is ignored. About half of the gold imports are re-exported as ornaments and other value addition. An expensive domestic gold would hit the international prices causing India to lose a lucrative market. India’s May trade deficit widened to $ 24.29 billion from $ 6.53 billion a year ago as gold imports surged to $ 6 billion from $ 678 million. During May, gold imports surged to 107 tonnes.
The new rates are to impact banking services to milling machinery for cereals and petroleum products at rates varying from 5 to 18 percent. It would impact family budgets as these cover wider ranging goods like LED lamps, ink, knives, blades, power-driven pumps, and dairy machinery from 12 per cent to 18 per cent; that for milling machinery for cereals from 5 per cent to 18 per cent; and that for solar water heaters and finished leather from 5 per cent to 12 per cent. The rate for work-contract services supplied to governments and local authorities is proposed to be increased to 18 per cent.
The rationale is difficult to understand like why a contractual service or pumping sets used by farmers or milling machinery for cereals should be taxed to make the basic food production expensive.
Country pining to export wheat and other grains need to rethink the benefits and losses of higher taxes on issues aiding its operations. The GST Council allows GoM recommendations on withdrawing exemptions for services such as the transport of passengers in business class from airports in the Northeast. Hotel accommodation costing under Rs 1,000 per day will be taxed at par with the industry (12 per cent). Hospital rooms except ICU, with a daily rent of Rs 5,000, could be taxed at 5 per cent. Government in the psot-covid situation has need for cash. It has to realise that the hotel and tourism industry suffered heavily during covid. Imposition of such taxes hit more the travelers, who have just started moving out. Penalizing them with high duties may have deleterious effect.
A cautious but pro-active step is the move to impose cess on export of petrol and diesel by private companies. The ministry says that they were compelled to take such action as crude prices recently spiked diesel and petrol have shown sharper increase. The refiners export these at globally prevailing prices, which are very high. The private refiners find exports highly remunerative. The domestic crude producers sell to domestic markets and prevailing international prices and make windfall gains. Certain refiners for purposes of export keep their pumps in the country dry. To check it Rs 6 on petrol and Rs 13 per litre on diesel or Rs 23250 per tonne have been imposed with a condition that they would not export more than 50 percent of the total crude production. For the same reason cess on aviation fuel too has been imposed.
The states should feel happy at the extension of the GST compensation cess for 14 percent CAGR till March 2026 but they also have to have concern for impact prices.
The RBI 25th Financial Stability Report sees global outlook uncertain and domestic situation though improving still away from being in ship shape and geopolitical risks warrant careful handling and close monitoring. The political situation and price movements would continue to create shaky conditions. The states are still not satisfied on the financial fall-out for them. Relook at rising rates and burden on the people is a must.

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