Having undergone constant administrative/structural changes and rate revisions since its July launch, it was an overhaul that awaited the goods and services tax (GST) on Friday. The GST Council has brought down the tax rates on another 178 items from 28% to 18%, leaving only 50 or just over 4% — compared with 19% initially — of the goods in the highest slab that consumers found pinching, dented consumption and fanned inflation. Essentially, the 28% slab has been restricted to sin goods (which also attract cesses), white goods, construction inputs like cement and paint, auto parts and aircraft/yacht parts while scores of mass-consumption, everyday-use items including fast-moving consumer goods will now attract GST at 18% (see chart). In addition, the rates were cut to 12% from 18% for 15 items, from 18% to 5% for six, from 12% to 5% for eight and from 5% to nil for six. These revisions along with rate cuts for about 100 goods effected previously, officials said, would pave the way for a convergence of the GST tax slabs — principally four now — to two eventually.
The council also cut the rates on all restaurants except those at five-star hotels to 5%, from the differential rates of 12% (non-AC) and 18% (AC), but deprived them of input tax credit (ITC) and a place in the tax chain. Restaurants have failed to pass on ITC benefit to customers, finance minister Arun Jaitley said, justifying the decision. Easing the compliance burden further, the council retained the interim summary GSTR-3B form and the tax that needs to be paid till the end of this fiscal and deferred filing of GSTR-2 (inward supplies) and GSTR-3 forms with no set date for resumption. The composition scheme — which allows a business to pay tax on turnover on a quarterly basis at very low rates without ITC — will be made available to businesses with a turnover up to Rs 1.5 crore, versus Rs 1 crore now, after the law is amended for this purpose, which would enable an ever higher limit of Rs 2 crore.
Composition-scheme units will have time till December 24 to file their first quarterly return (GSTR-4) for the July-September period. The tax rate for composition-scheme units will now be a uniform 1% for manufactures and traders and exempt goods would not be counted for turnover (on which the tax applies). The sweeping rates revision clearly showed the council’s realisation that the way to getting more revenue was indeed not to jack up the tax rate and load the taxes onto a narrow base but to expand the tax base with benign rates. However, structural distortions of the new indirect tax multiplied with the deferment of the GSTR-2 and 3 filings (without which invoice-matching can’t be done) and proposing to give over 95% of the taxpayers (except service providers) the option to not be part of the GST chain, the purpose of which is to curb tax cascades. Finance secretary Hasmukh Adhia said the GSTR forms might be simplified further; to start with, the GSTR-3B form has been eased for assessees who file nil-tax returns.
The revenue loss on account of pruning the 28% slab and tax cuts for restaurants is seen at Rs 20,000 crore annually, Adhia said, but much of this, analysts felt, could be made up with enhanced compliance over a period. The finance minister too said that quantifying revenue implication of the council’s decisions at this point was a theoretical exercise as improved compliance going forward could make up for the lost revenue due to “rate rationalisation”. “The of rate from 28% to 18% on 178 items is a step in right direction and is indicative of a policy shift from principle of ‘equivalence’ to what is right for GST structure and consumers. It would be good if the 28% slab is further pruned in the next few months which will lead to fewer tax slabs in next couple of years. Due to anti-profiteering provisions and market dynamics, this should lead to reduction in prices for the consumers,” said Pratik Jain, leader, indirect tax, at PwC.
Computing a revenue-neutral rate (RNR) of 15-15.5%, a panel headed by chief economic adviser Arvind Subramanian had earlier said a lower rate of 12% and a standard rate of 18% will have negligible retail inflation impact while a higher RNR (on a lower base) with merit rate of 12% and standard rate of 22% would have a significant 0.3-0.7% impact on inflation. Under pressure from many states, however, the council had to keep 230 items (19% of the total) under 28% rate. Apart from the so-called luxury goods and demerit items (which attracted cesses too), scores of mass consumption and everyday-use items including FMCG goods were put under the highest slab.
Jaitley had then justified the decision, saying that over a third of items had previously been taxed at 27% (Centre plus states) or above and so the equivalence principle demanded that at least a good fraction of them is taxed at a comparable rate. The fact, however, was that the real tax incidence on these items were 4-5 percentage points lower because the excise duty was levied on the ex-factory price and SMEs enjoyed excise waivers on several of these items. At its 23rd meeting, however, the GST Council refrained from allowing the benefit of composition scheme for businesses with interstate supplies. If implemented, this would have marred the GST’s effectiveness further.
“The government will now have a serious challenge in meeting the revenue targets and this may lead to higher payouts to the state governments for meeting the shortfall in revenue collection. It seems the government is backing on higher collection due to better compliance and increase in taxpayers tax base,” said Rakeh Nangia, managing partner at Nangia & Co.