Federal indirect tax body, the Goods and Services Tax (GST) Council, is likely to announce a cut in the tax rates at its Friday meeting on products and services that typically are not major revenue generators for the central and state governments. Items which are likely to see a tax rate reduction include luxury hotels and outdoor catering services, said a person familiar with the deliberations of the Council. The idea is to provide impetus, by way of lower taxes, to segments of industry which are not big revenue contributors.

“A tax rate reduction in these two segments will have negligible revenue impact on the exchequer. On the other hand, a rate cut on products like automobiles will have huge revenue implications to the government. The expectation of a rate cut in the last few weeks itself has hurt the auto industry prompting people to postpone their purchases," said the person cited above. Luxury hotels which charge a tariff of ₹7,500 a night are taxed at 28% and outdoor catering services at 18% now.

The Council meeting on Friday comes amid a deepening economic slowdown which has hit revenue of both central and state governments. The central government, which is constitutionally obliged to compensate states for their GST revenue loss till 2022, is facing a revenue shortfall while under pressure to take steps to steer the economy out of the slowdown. States have argued that the central government can borrow from the market if there is shortage of funds to compensate them and can repay this by extending the levy of GST cess by 2-3 years beyond 2022. The fiscal pressures of central and state governments are likely to be discussed at Friday’s meeting.

Officials of the Fifteenth Finance Commission (FFC), which will recommend a formula for sharing the union government’s divisible pool of tax revenue with states, will discuss the fiscal position of the states and the Centre at the GST Council meeting. The FFC has to submit its recommendations by the end of November. It will determine the way resources will be shared between the Centre and state governments for five years beginning April 2020.

Source:livemint