The GST conundrum: To tax or not to tax
Finance
A couple of weeks back, news channels and social media platforms were buzzing with reports of a plausible reduction of petrol and diesel prices. This is because the Kerala High Court directed the GST Council to review and vote on whether petroleum products like petrol, diesel, and natural gas could be brought under the GST taxation norms. The GST council decided against the proposed change - disappointing the majority of Indian consumers.
But why do the public and the government have conflicting opinions?
Why does the public want GST taxation?
Across the country, petrol and diesel are transacting at their peak prices. The primary reason for such exorbitant prices is the taxes levied by the state and central governments of India.
Under GST norms, the maximum tax would only be 28% - resulting in a significant reduction of end prices!
Why is the government averse to GST?
Simply put, fuel taxes are cash cows for the state and central governments. As much as 15-20% of their total tax income comes from fuel taxes levied.
Any changes in the tax slabs will directly affect the government's revenue.
The Indian government needs money!
India has been witnessing an economic slowdown, even in the pre-pandemic era. COVID-19 and the consequent lockdowns only aggravated the situation. The government is doing all it can to revive the economy, and to do so it needs money!
The recent announcement of an asset monetization plan, the impending IPOs of PSUs such as LIC, and the disinvestment of many public assets, are all desperate attempts of the government to shore up its cash reserves.
Cutting corners
In its attempt to cut corners wherever possible, the GST council has put the onus of collecting taxes on Swiggy and Zomato for the food items delivered. This responsibility was initially with the restaurants serving the food. This move is intended to avoid any revenue leakages for the government.
Data shows that many restaurants underreport their payments and avoid paying GST though the taxes are charged to the end consumer. Many small restaurants also keep their business swept under the carpet to avoid GST payments.
Drawing public flak!
The public obviously is not happy with the increased prices. Given that the pandemic created chaos, the public anticipated government reforms to reduce inflation and improve their ease of living. On the contrary, the government has been steadily increasing the taxes, drawing public displeasure.
Looming inflation threat!
The government argues that maintaining consistent tax revenue is in the interest of public welfare and reducing the taxes will, in fact, add to consumer woes.
However, increased prices of fuel could result in inflation. The consumers would end up spending less, reducing the demand for other products. Consequently, the economic progress will slow down even further.
What next?
GST is conceptualised on the concept of “One Nation One Tax”. It is ironic then that a few products such as petrol and diesel are conveniently excluded from this regime. It is highly unlikely that the government will give up on its golden goose; fuel is a price inelastic product that shall have consistent demand, despite prices skyrocketing.
Perhaps the public must wait for the next elections in 2024 for a change, or hope for an EV revolution!
Is the USA running out of money?
Finance
On Tuesday, Janet Yellen, US Treasury Secretary, in a letter to Congress leaders, informed that the federal government will run out of cash by October 18, unless it is allowed to borrow more money.
This comes after the Senate Republicans, on Monday, blocked a government funding bill that allowed for either increasing or suspending the debt ceiling, and also extending the current spending levels.
Unless a bill is passed, the government will shut down and also, default.
Why does a shutdown happen?
The budgeting is done via an appropriation bill by the United States Congress, which is then voted upon by the House of Representatives and the Senate.
A shutdown occurs when there is disagreement over budget allocations, leading to failure in enacting funding legislation to finance the government as a temporary funding measure, or for its next financial year.
The shutdown can be temporarily avoided with a continuing resolution, which can extend the government funding for a set period.
Has the government ever shutdown?
Yes, so far, the US government has had 10 major shutdowns, while there have been a total of 22 funding gaps. The latest and the longest one was for 35 days between December 2018 and January 2019, the second time during President Donald Trump’s regime.
This led to laying off 380,000 federal workers, while an additional 420,000 employees worked without any known payment dates. This shutdown cost the government more than USD 10 billion, excluding the indirect costs that were difficult to quantify.
Current shutdown avoided via continuing resolution
On September 30, hours before the deadline, a short-term appropriations bill was passed which will extend the current spending limit, ensuring that there will be no government shutdown, at least till December 3.
However, the debt ceiling limit is still blocked, meaning that the US government can still default on its debt obligations on October 18.
What is this debt ceiling?
The debt ceiling is a cap on the total amount of money that the government is allowed to borrow to meet its financial obligations.
The current debt ceiling is USD 28.4 trillion, this limit was technically hit on 1 August 2021, but the Treasury has been taking “extraordinary measures'' so that the limit does not become binding.
However, soon these measures won’t be enough and unless the limit is suspended, the government will not have enough cash to pay its obligations.
“An event that will be catastrophic for the economy”
While the exact date may change due to the unpredictability of the cash flows, Yellen made it clear that unless there is a deal, the US government for the first time in history will default on its obligations.
Yellen warned that even flirting with the possibility of default will rattle the financial markets.
She reminded the Congress of the 2011 incident when Congress waited till the end moment to raise the debt limit, leading to higher borrowing costs for the government and the consumers.
Extent of loss
According to Moody’s Analytics, if the treasury defaults, there will be:
4% decline in economic activity
Loss of 6 million jobs
Rise in the unemployment rate to 9%
Stock sell-offs wiping USD 15 trillion in household wealth
Spike in interest rates on mortgages, consumer loans and business debt
This is in the US alone. A default in debt by the US government will act as a domino effect for the stock markets across the globe.
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