The latest round of rate rationalisation announced by the GST Council on July 21 has been met with a rather uncharacteristic response. Industry, across product categories, has openly issued statements on the futility of the rate cuts, emphatically asserting that the slashing of levies would not have any impact on the prices at the consumer end. In the four rounds of rate rationalisation done so far, this has been an exceptional defiance by industry on the perceived impact of cuts in rate.
While the cut in rates focused on about 88 items such as white goods and exemption to sanitary napkins, the Feminine and Infant Hygiene Association (FIHA), which represents companies such as Johnson & Johnson, P&G and Kimberly Clark, emphatically declared Thursday that the decision to exempt sanitary napkins, while being “well intended”, was unlikely to make this essential category more affordable. “The exemption of the finished product of sanitary napkins from GST effectively denies input tax credit to firms manufacturing in India, as a result, in order to offset the loss, the companies will not be able to pass any significant benefit to the consumers,” the lobby group said.
There have been similar responses from publishers, despite the reduction in GST on e-book sales from 18 per cent to 5 per cent on books with a print version. The hotel industry’s response on the impact on room occupancies of the Council’s decision to levy tax on the transaction value of hotel rooms instead of the declared tariff was on similar lines.
This could be bad news for the Council, especially since some states have already come out in public to air their objections to the product categories that were selected for the cuts — non-egalitarian items such as refrigerators and washing machines instead of products of mass use. After the Council’s meeting, Kerala finance minister Thomas Isaac termed the decisions as “undemocratic” and said if revenue buoyancy had been the basis, it would have been done for necessities.
Punjab finance minister Manpreet Singh Badal wrote to the Finance Minister Piyush Goyal about the rushed process of clearing changes in GST-related laws without adequate consultations with states or public feedback.
State finance ministers also pointed out the late circulation of the meeting agenda related to rate cut of consumer goods on the day of the meeting itself. The changed stance of the proceedings of the Council was also visible through the decision to not refer rate cut proposals for consumer goods to the fitment committee and senior officials in charge of GST being relegated to back rows as electoral perspective gained precedence over tax bureaucracy and their revenue considerations.
The response to the decisions of the Council’s July meeting makes it more difficult to push through the immediate agenda — rate rationalisations across the luxury and sin goods in the topmost slab of 28 per cent and a simple returns filing system — that are priorities of the government in the second year of GST. So, while the first year had ushered in a series of changes in response to the initial “teething” problems — suspension of GSTR-2 and GSTR-3 returns, tweaking rules for providing incentives for small firms and deferment of reverse charge mechanism, where businesses in the organised sector gained, small and medium scale enterprises are still catching up. This was a fact acknowledged by the Council, which plans to focus exclusively on issues related to micro, small and medium enterprises in its next meet on August 4.
On the impact so far, industry is a divided house. Ishant Goyal, who manages a edible bran oil refinery with a turnover of over Rs 400 crore in Jagraon, Ludhiana, says the GST regime had its shortcomings but the overall experience over the last 12 months has been positive. His business gained from reduction in the tax incidence to 5 per cent from about 9 per cent tax (7 per cent VAT and 2 per cent central sales tax) incidence in the pre-GST regime.
Pradeep Mehta who runs Ajaymeru Metals Pvt Ltd, a sheet metal component manufacturing unit in Noida with a turnover of under Rs 20 crore, also termed the transition to the GST regime as beneficial but pointed out that further simplification is needed for small-scale businessmen.
Rate tweaks and impact on revenue
The GST Council has undertaken four rounds of rate rationalisation so far — October 6, November 10, January 18 and July 21. The first significant rationalisation of the 28 per cent slab was done in November last year by removing about 178 items such as chocolates, chewing gums, detergents, hair creams, fans, pumps, lamps, sanitaryware, wires, cables and bringing them to the 18 per cent slab, leaving only 50 items in the highest tax category. The July 21 round has removed another 15 items such as washing machines, small screen televisions, leaving around 35 items in the peak slab.
The impact of rate tweaks has been visible in the monthly GST revenues that were hit in each month of rate rationalisation followed by a pickup in the subsequent months. October revenue had slipped to Rs 85,931 crore, further to Rs 83,716 crore in November before rising again to Rs 88,047 crore in December. Again in January the revenue collections dipped to Rs 88,047 crore, only to bounce back subsequently.
With an eye on elections, revenue considerations have been clearly set aside as of now. “Decisions of the Council were guided by simplification, rationalisation… it has also been decided that the Council will rise above revenue consideration and focus more on job creation and economic growth,” Finance Minister Piyush Goyal said on July 21.
The government is now inching closer to phasing out the 28 per cent slab, as stressed upon by the then Chief Economic Adviser Arvind Subramanian last month.
Optics and compliance
The recent round of rate cuts has left businesses apprehensive about anti-profiteering action from tax authorities if they are unable to pass on the benefit of rate cuts as lower prices to consumers, given restrictions on the input tax credit availment in case of exemption and other external costs such as the decline of rupee. Manufacturers of some items such as sanitary napkins have already raised concerns about their inability to lower prices.
Also, the decision to cut GST rates for consumer goods hinged on the premise that lower tax rates would lead to lower tax burden and hence, better tax compliance. Goyal last week said that the revenue impact would be “marginal” when compared with the expected increase in compliance as a result of the lower GST rates.
Tax experts, however, are sceptical given the usual non-tax compliant nature of Indians and stress upon bringing in ‘invoice matching’, the original feature of GST framework that was never rolled out. “While simplifications to GST are necessary and will improve the compliance overall, it is essential to retain the original GST architecture of invoice matching as that would create an audit trail and improve revenues ” MS Mani, partner, Deloitte India.
Merger of slabs, excluded items
The trimming of the 28 per cent slab is being seen as the first step towards merger of the 12 per cent and 18 per cent slabs that include majority of the goods and services, though revenue considerations may imply a longer wait. Tax experts say that a merger towards 15 per cent would imply a further revenue impact, expected to be far greater since service sector is being charged at 18 per cent. Also, they say a rate cut is widely welcomed by industry but a rate hike from 12 per cent may not invite similar reactions.
Inclusion of excluded items, however, could happen before the government embarks on the merger of tax slabs. The government has already stated that out of the five items outside the ambit of GST, natural gas and aviation turbine fuel (ATF) are the two easier candidates for inclusion. While products such as LPG, kerosene, naphtha, furnace oil, light diesel oil attract levy of GST, five petroleum products — crude oil, diesel, petrol, natural gas, ATF — still out of the its ambit. Petroleum ministry and Civil Aviation Ministry have approached Finance Ministry for the inclusion of petrol, diesel and Aviation Turbine Fuel, respectively, under GST.