By Rahul Renavikar
On Independence Day last week, Prime Minister Narendra Modi announced that there will be a bonanza for consumers this Diwali as he intends to unleash long-awaited goods and services tax (GST) 2.0 reforms. While this announcement was expected to be made by the finance minister, who is the chairperson of the all-powerful GST Council, it surprised many that the PM chose to do so even before a formal approval from the council had been obtained. No doubt, the next GST Council meeting scheduled in September would take up the issue. In the mean time, it will be interesting to see the political reactions to the PM’s announcement as every political party will pounce on the opportunity to take credit.
According to the announcement and subsequent reports in the press, the complex multi-rate GST structure that prevails currently is proposed to be replaced by a simple two-rate structure (with an additional special rate of 40%). The GST rate slabs proposed to be retained are 5% and 18%, while the 12% and 28% rates would be done away with completely. The stock markets have already given the thumbs up to these announcements, notwithstanding the adversities on account of the additional tariffs imposed by the US.
The pitfalls of a two-rate GST structure
Right from the inception of the GST in 2017, policymakers, tax experts, etc. were all of the firm view that its rate structure (running into double digits along with the compensation cess) then adopted was full of flaws, creating confusion among taxpayers. India is perhaps the only large country in the world where the rate of consumption tax is not determined on the product consumed but on the kind of packaging it comes in. A case in point is namkeen, where unbranded ones attract a 5% GST whereas branded and nicely packaged ones attract 12% GST. This and many other such strange classification ideas need a burial which the upcoming GST rate rejig will hopefully do.
However, the proposed two-rate structure of 5% and 18% can turn out to be a perfect recipe for disaster if it is not implemented in the right manner. The difference of 13 percentage points between the two rates itself is an invitation for scamsters to evade taxes. This large gap between the rates might also result in an inverted duty structure (output GST rate lower than the input GST rate) for almost all the supplies, attracting a 5% GST rate, assuming that input tax credit is allowed for this slab. If at all the two-rate structure has to be implemented then a robust, almost automatic, refund mechanism also needs to be in place so that businesses do not fall in the locking-of-working-capital trap. Given the Indian GST’s tryst with false input tax credit claims in the last eight years, running into lakhs of crores of rupees, introducing an automatic GST refund mechanism for businesses might turn out to be setting the cat amongst the pigeons. Ideally, a single-rate consumption tax structure ought to be implemented (as done by more than 125 countries) to keep the India’s GST simple and free from any classification disputes, including avoiding the inverted duty structure. It should not be the case that the medicine turns out to be more painful than the disease!
Fixing ITC and expanding GST’s scope
Along with the GST rate rejig, the government should also re-haul the current input tax credit mechanism. The crux of any value added tax system (India’s GST is a value added tax system where supplies of goods and/or services are taxed) is the ability of the taxpayers to claim full input tax credit on almost all the goods and services procured while supplying taxable goods and/or services without any exceptions or hindrances. The input tax credit mechanism in India’s GST is anything but simple and needs to be rectified to a very large extent. A simple solution lies in allowing input tax credits of almost everything (with a small negative list) that the businesses procure to run their operations. This will totally eliminate the cascading of taxes, making the supplies of goods and services less expensive which ultimately will benefit the end consumer.
If the GST 2.0 reforms have to truly bear the expected fruits, the government should seriously include petroleum, electricity, alcohol, and real estate in the tax ambit. Keeping them outside the GST umbrella makes little economic sense. It is high time that these were included in the GST so that cascading of taxes in these sectors is done away with once and for all. If it has taken eight long years to bring in the GST 2.0 reforms, it is anybody’s guess as to how much longer will it take to have these in the GST fold. Unless this is done, we as a nation will not be able to realise the true GDP growth potential that a flawless GST has to offer. The Centre and the states should come together and display a true behaviour co-operative federalism, as enshrined in our Constitution, to make this a reality sooner than later.
Thus, an overall approach of rectifying/re-hauling the GST will go a long way in making India-made goods and services competitive in not only the local markets but also the international markets, paving the way for turning the country into an economic superpower that can compete with the likes of US and China.
The writer is managing director, Acuris Advisors Pvt. Ltd.
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