After an initial focus on revenue collections and building the basic infrastructure for rollout of the goods and services tax (GST), the biggest tax reform since Independence, the thrust is now shifting towards simplifying procedures for small and medium enterprises — the segment seen to be worst hit by demonetisation and GST.
Further rate rationalisation, especially for the beleaguered construction sector, including a rate cut on cement and under-construction properties, are in the offing in January, just before the country will head towards the general elections.
At present, cement is in the topmost tax slab of 28 per cent under GST, while under-construction properties attract 12 per cent GST after one-third abatement of value of land, which is outside the ambit of GST. The GST rate on cement is likely to be brought down to 18 per cent, a move which will cost about Rs 13,000 crore a year, while rate on under-construction property could be lowered to 5 per cent.
A composition scheme for small service providers, in line with the existing composition scheme for traders, manufacturers and restaurants where a low nominal tax rate is levied, is also being worked upon by the law committee and fitment committee of the GST Council.
The inclusion of service providers under the composition scheme, however, is likely to meet with some resistance from the states who had opposed its inclusion earlier as well due to concerns regarding low compliance rate as has been observed in the case of traders and manufacturers.
Also, the fact that value addition for services sector is much higher than that for manufacturing or trading and therefore, higher revenue ramification by offering a lower tax rate is one of the biggest concerns in bringing such a scheme for service providers, a senior state government official said.
Under the composition scheme, businesses with annual turnover of up to Rs 1 crore can opt for the scheme. Traders and manufacturers under the composition scheme are allowed to pay taxes at a reduced rate of 1 per cent, while restaurants are required to pay tax at 5 per cent rate and file quarterly returns.
As per the latest available official data, out of 19.31 lakh composition scheme dealers, 11.47 lakh filed their quarterly return for January-March in April, a compliance rate of 59.40 per cent.
The Council has also given in-principle approval for amendments in GST-related laws for creation of a centralised appellate authority for advance ruling (AAAR) to deal with cases of conflicting decisions by two or more state appellate advance ruling authorities on the same issue.
Return filing and refund mechanism are also being simplified, with the new return filing system to be introduced on a trial basis from April 1 next year and on mandatory basis from July 1 next year. While the new return filing system is expected to plug evasion with the originally envisaged feature of invoice matching, a strict enforcement may take time given the transition time required for the new system, another government official said.
Finance Minister Arun Jaitley in a Facebook post on Monday stated that as the GST’s transformation is completed, it’s moving towards completion of the first set of rate rationalisation, that is, phasing out of the 28 per cent slab, except for luxury and sin goods. The next priority will be rate reduction for cement, he said, adding that as revenue rise “significantly”, a standard rate between 12 per cent and 18 per cent will be fixed under GST. “The country should eventually have a GST which will have only slabs of zero, 5% and standard rate with luxury and sin goods as an exception,” he said.
In July, Jaitley had said a single slab GST, as proposed by Congress leader Rahul Gandhi, is a “flawed idea”. In June, in another post, he had written, “should we have same rate for food items, hawai chappals and BMW cars?”
The proposed path towards further rate rationalisation is based on the expectation of revenue buoyancy going ahead, a notion which is though being questioned by many states. Kerala’s Finance Minister Thomas Isaac, who has already approached the Council for a disaster cess in the aftermath of floods in the state, had after September’s GST Council meeting stated that the current GST rates are not revenue neutral. Going ahead, while GST will be simplified, the most important implication of revenue concerns from states would be a longer waiting time for inclusion of petroleum products under the indirect tax regime as states will hold on to their powers to tax petroleum products and alcohol.