Major rejig of GST slabs unlikely for now

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New Delhi | December 16, 2019 6:21 AM

Several states against rates overhaul; cess, rates on some items may go up.

At the time GST was launched in July 2017, the effective overall tax rate was 14.4% but after several rounds of rates cuts over the last two years, the effective rate is now 11.6%.

While the Centre apparently believes that nothing less than a major rejig of the goods and services tax (GST) slabs will suffice to boost collections given a big revenue shortfall, most states are unwilling to vote for such an overhaul in the GST Council meeting on Wednesday and may argue that the immediate exercise of rate changes should be a limited one.

Speaking to FE, Bihar deputy chief minister Sushil Modi said that it was unlikely the GST Council would agree to move items in the 5% tax slab to a higher slab of 8-10%, as it would put an onus on the common man and hit consumption, without yielding any substantial revenue gains. Stating that states had not suggested any rate hikes while such a proposal had been made by the GST Secretariat at the Centre, Madhya Pradesh’s commercial tax minister Brijendra Singh Rathore told FE that it was unreasonable for the Council to raise the rates upwards at this juncture. “Earlier, rates were pruned without proper consultations due to political expediency but the practice of frequent rate revisions is not acceptable,” he said. Speaking to a TV channel last week, Kerala finance minister Thomas Isaac said that his state would oppose any suggestion to raise rates of items, which are currently taxed at 5%. However, he added that if rate hike is the only recourse then the 18% slab should be moved upwards.

Speaking to FE, state tax officials from Maharashtra and Jharkhand, who are part of fitment and law committees of the GST respectively, broadly agreed that the idea that a major slabs recast is easier said than one. They added that such an exercise was anyway unlikely to be approved by the Council on Wednesday, as the pros and cons of it had been not been analysed by states. They said, however, that some rate hikes for a handful of items along with imposition of cess on a few more items could be considered. A group of ministers could be set up to study the rate rationalisation and build a consensus on hiking slabs and merging 12% and 18% slabs, one of these officials said.

Even West Bengal finance minister Amit Mitra, who has called for immediate steps to augment GST revenue in the context of the delayed compensation payments to the states, said that input tax credit frauds were continuing unabated and this could be a major reason behind the revenue shortfall. According to him, development of business intelligence systems in each state was the need of the hour.

At the time GST was launched in July 2017, the effective overall tax rate was 14.4% but after several rounds of rates cuts over the last two years, the effective rate is now 11.6%. The central tax officials say that revenue collections would improve only if rates are ‘corrected’ and the brought back to the revenue-neutral levels computed before GST roll-out.

As reported by FE earlier, the council will likely increase the existing cess on so-called luxury/demerit goods and also impose such levies on a clutch of other items. It may also correct the inverted duty structure (where the tax on input is higher than on the final product) on a host of items. This is expected to address the issue of certain sections of taxpayers claiming input tax credits more than the actual tax content in their inputs — in some cases, even claiming refunds without any actual output tax outgo in cash.

Addressing reporters here on Friday, Union finance minister and chairperson of the Council Nirmala Sitharaman countered speculations about a restructuring of the GST slabs of 5%, 12%, 18% and 28% to address a big shortfall in collections, saying the finance ministry hasn’t yet discussed any such issue. “Buzz is everywhere other than my office,” she remarked, but did not rule out a hike in GST rates of some items.

Modi had earlier told FE that, “Increasing the cess on automobiles has limited utility given that vehicle sales are down.” According to him, the cess route is “the only feasible option” to ensure that the states continue to enjoy the protected SGST revenue growth of 14% annually. Modi added that it was difficult to see the council agreeing on increasing the tax rate on items which attract nil tax now (there are 156 such items). These items include unpackaged grains and other items of mass consumption. He also said increasing the cess on tobacco and aerated drinks could be the most viable option.

After two consecutive months of contraction, GST revenue grew 6% in November 2019 (concerning mostly October transactions), to report the third-largest monthly mop-up of Rs 1.03 lakh crore since the tax’s launch in July 2017. A pick-up in consumption during the festive season seems to have contributed to the increase in mop-up, rather than any incipient economic recovery.

GST mop-up in October — concerning mostly September transactions — came in at Rs 95,380 crore, 5.29% lower than in the year-ago month. The September GST collections were just Rs 91,916 crore, a 19-month low and 2.7% lower than the year-ago month.

Given the yawning revenue GST revenue shortfall and the shrinking compensation kitty, the 38th GST Council session to be held here on December 18 is slated to discuss several options to boost revenue. According to recent letter from the council secretariat to states, the options include reviewing the current list of exempt items, as well the current GST and cess rates.

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