‘Neither luxury nor sin good’: GST tax rate on 2-wheelers may witness a cut

FM Sitharaman told the industry body that this matter will be taken up with the GST Council, which is the apex federal body on matters related to the indirect tax

The government may consider bringing down Goods and Services Tax (GST) on two-wheelers from the highest slab of 28% as finance minister Nirmala Sitharaman on Tuesday told the industry that two-wheelers are neither a luxury nor a sin good, hence merit a rate revision.

A government official aware about the development said on condition of anonymity that the matter is under consideration to boost sagging demand of automobiles, but the Union finance ministry has only recommendatory role. (HT Photo)

Responding to an industry suggestion on the need for lowering the GST rate on two-wheelers at a close-door meeting of Confederation of Indian Industry (CII) through video conference, she said “this was indeed a good suggestion as this category is neither a luxury nor a sin good and hence merits a rate revision,” a CII statement quoted her as saying.

Sitharaman told the industry body that this matter will be taken up with the GST Council, which is the apex federal body on matters related to the indirect tax. The GST Council is chaired by the Union finance minister and finance ministers of states are its members. The council’s decisions are often unanimous.

A government official aware about the development said on condition of anonymity that the matter is under consideration to boost sagging demand of automobiles, but the Union finance ministry has only recommendatory role. “Any decision in this regard will be taken by the GST Council,” the official said. While sale of passenger vehicles has plummeted by about 4% in July 2020 compared to the corresponding period last year, two-wheelers’ sales plunged by 15.24% in the same period.

“It is not yet clear whether matters related to tax rationalisation would be taken up in the 41st meeting of the GST Council or in the 42nd meeting,” the official said. The 41st meeting of the GST Council is scheduled on August 27 and the 42nd meeting is expected next month on September 19.

A finance ministry official said requesting anonymity that the first meeting on August 27 is expected to consider only one matter – how to pay compensation to states for their revenue shortfalls? “It is likely that tax rate rationalisation matters would be taken up on September 19 along with various other reforms,” he said.

As told by finance minister Nirmala Sitharaman after the 40th meeting of the council on June 12, the August 27 meeting will be special as it will discuss only one matter - how to pay compensation to states at a time when the compensation cess collection has plunged because of weak economic activities due to Covid-19 pandemic, he said.

While briefing reporters after the 40th meeting, Sitharaman had said on request of members the Council would meet again in July to discuss only “one-agenda item” -- compensation to states.

“Compensation, which has to be given to states, and, if at all, it results in some kind of borrowing, how and who is going to pay for it,” she had said. The meeting was, however, deferred to August, due to some technical reasons, the official said.

At the time of introducing the new indirect tax regime in July 2017, the GST law assured states a 14% increase in their annual revenue for five years (up to 2022) and their revenue shortfall should be made good through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products.

The official said, the 42nd meeting of the Council on September 19 is generic in nature and may consider revising tax on several items that suffer from inverted duty such as fertilisers, footwear, renewable energy devices, tractors and man-made yarns and fabrics. Inverted duty structure is a situation in which inputs are taxed at a higher rate than finished goods.

Jigar Doshi, founding partner of a tax technology firm TTMS LLP, said, “The applicable GST rate on two wheelers is 28%, which is usually for the sin or luxury goods. Since two wheelers do not form part of either category, the same has been under consideration and recommendations for rate reduction.”

“It is relevant to note that the input tax credit on two wheelers is restricted under the Act (unless for furtherance of business). Given that two wheelers might be essential, especially for the non registrants [those not registered under GST] or small organizations, a rate cut will be a major sigh of relief,” he said.