While approving the laws, few important changes were proposed. First, a maximum ceiling of GST rates got increased from 14% under the central and state GST laws, respectively, to 20%, thereby effectively increasing the cap from 28% to 40%.
Eleventh meeting of the GST Council was rather constructive, wherein the Council endorsed the central GST and integrated GST laws. The laws would, now, be vetted from a legal perspective again to incorporate minor changes, post which the same would be tabled before the Cabinet for their approval. Once the laws are cleared by the Cabinet, the same would be presented before Parliament in the second half of the Budget Session around March 22 or so.
Post-finalisation of the state and Union territories’ GST laws, a major meeting would be held where fitment of rates for various goods/ services would be presented before the GST Council and approved. The industry is anxious as to how the products would be categorised under various slabs. One of the key concerns pertains to possible items, which would get covered under 28% category. While the initial understanding was that this category would be limited to few products—as outlined in the chief economic advisor’s report—later the government indicated that several other items, which attract an effective rate of over 25-26% at present, could get covered under this slab. This would significantly dilute the benefits that GST would otherwise offer, by way of reduced prices to the consumers and spur in demand/consumption.
While approving the laws, few important changes were proposed. First, a maximum ceiling of GST rates got increased from 14% under the central and state GST laws, respectively, to 20%, thereby effectively increasing the cap from 28% to 40%. Not so long ago, opposition was hammer and tong arguing that the maximum rate of GST should not exceed 18% and there should be a constitutional embargo to this effect. Not only this resistance has faded away, it seems that there is a political consensus at a maximum rate, which is more than double of what was initially envisaged!
It is comforting to see that the government intends to maintain the existing slabs of 5%, 12%, 18% and 28%, as announced earlier, even though the maximum rate would be capped at 40%. However, the industry would be concerned that rates might go up, once GST is implemented, much like what happened after VAT was introduced in 2005. Since the central government any way is contemplating to impose cess on few commodities, over and above 28%, the rationale of keeping such a high ceiling in the laws is not clear. It might be better to reconsider this decision and keep the maximum rate at 28%, which itself is arguably much higher than what was expected earlier.
For small businesses, below an annual turnover of R50 lakh, lower rates have been agreed to—5% for restaurants, 2% for manufacturers and 1% for others. In the earlier draft, 5% was a minimum rate under this scheme for manufactures and 2% for traders. The scheme was not envisaged for service providers.
Therefore, the new proposal is beneficial to the industry as it reduces the rate for small manufacturers as well as traders, and also covers service providers within its ambit.
The industry association of small restaurants has apparently made a representation to the government to reconsider this and bring it at par with other service providers (1%). They may have a point here. If the intention of the government is to incentivise small businesses and not burden them with compliances, then ideally it should be done for all of them equally. Also, GST is on ‘supply’ and not on ‘sale’, ‘service’ or ‘manufacture’, hence any distinction between manufacturers and others should be best avoided. Nonetheless, a composition scheme for small businesses is a good idea.
In a press release, the government also reiterated that 90% of the refund claim would be allowed on provisional basis to exporters within seven days of filing of refund application. The quantum of refund under GST could increase significantly for exporters as upfront exemption/concession from tax on procurements would not be available in most cases. Therefore, the industry would hope that this provision is operationalised effectively so that working capital issues for the industry are minimised.
It was also mentioned that under GST, the commissioner would be empowered to allow payment of tax in instalments. This should help businesses going through a financial hardship, though they will have to pay interest at the applicable rate and their customers would not be able to claim input credit till the time GST is deposited with the government.
Provision pertaining to ‘anti-profiteering’ continues, despite a strong voice from the industry against it. It’s important for the government to quickly come up with the mechanism by which this provision would be operationalised, so as to allay the fears of ‘price control’. Further, the time limit for such a provision should also be clearly articulated.
All eyes are now on the next GST Council meeting on March 16, where the final GST laws are expected to be formally approved. That would dispel whatever little doubt that industry might have on GST getting implemented from July 1, 2017. The traders’ bodies have asked the government to consider September 1, 2017, as the implementation date, as they feel that SMEs may not be ready by July 1. They might change their stand, if the outreach program of the government, which is expected to April 1, is well planned and effective.
-The author is India indirect tax leader, PwC India. Views are personal