Sales Tax Rates Slashed as India Faces Deepening Growth Slowdown

  • Exporters, facing liquidity issues, receive short-term relief
  • GST Council to reduce compliance burden for some businesses

India slashed tax rates on 27 items and extended the period for small businesses to file returns in a bid to reverse the economic sentiment dampened by a chaotic roll out of the new nationwide sales tax.

The GST Council, headed by Finance Minister Arun Jaitley, allowed exporters to continue with exemptions that existed before the tax roll out until the end of the financial year in March 2018. For small businesses, it was decided that establishments with 10 million rupee ($152, 686) turnover can deposit tax under a composition scheme, helping them to avoid tedious filing. The earlier limit was set at 7.5 million rupees. Businesses with a turnover of up to 15 million rupees can file quarterly returns, Jaitley announced.

Indian exporters were facing liquidity issues, Jaitley said, noting the government would start refunding exporters for July and August from Oct. 10. A nominal 0.1 percent GST on exports will be imposed until March 31, while an e-wallet facility for exporters will launch on April 1.

The panel decided to reduce tax rates for items including diesel engine parts, man-made yarn, ready-to-eat snacks, plastic and paper waste.

Read more: Reality Check for India’s Central Bank as Slowdown Deepens

The measures come as the economy grew at 5.7 percent in April-June quarter, the slowest in the last three years, as companies and retailers pared inventories of goods before the roll out of the GST and struggled to recover from last year’s shock cash ban. On Wednesday in a rare move, Prime Minister Narendra Modi defended his government’s record on economic management and pledged to reverse the slowdown ahead of 2019 federal elections.

Exports, which account for over 20 percent of India’s GDP, have seen a decline of 15-20 percent in August this year compared to the same period last year, Ajay Sahai, director general of the Federation of Indian Export Organisations, said. Earlier, exporters did not have to pay taxes for imports used for exports. However, under the new tax regime, they have to pay GST, which is refunded.

While global economy is slowly improving, Indian exports have not been able to maintain their market share, while complexities in the GST’s design had compounded the problem. Exports rose 10.29 percent in August, after registering single-digit growth in the previous three months, aided by rising petroleum prices and growing engineering exports.

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