As talks of a hike in goods and services tax (GST) rates gain momentum, there is a sense of disquiet among states regarding any major tinkering of the slabs, especially the lower tax slab and exempted items. The Council meeting of December 18, coming in the backdrop of the Centre’s struggles on the revenue side sets the stage to reverse the direction of rate cuts.
The emerging view is that revenue gain from any such rate hike has to be substantial and not cause inconvenience to the common man, though they are of the view that ways need to be found to narrow the widening revenue gap.
Punjab’s Finance Minister (FM) Manpreet Singh Badal said that knee-jerk reactions such as a cut in GST rates before elections and a hike in rates in times of revenue slowdown are not needed and GST needs to be looked afresh and a “holistic overview” needs to be taken. “We need to take a holistic overview of the entire GST, what I call GST 2.0. Let us go back to the drawing board, let us look at this whole gamut of GST afresh. You can’t be running a modern state with knee-jerk reactions like when there were Gujarat elections, you reduced the rates. Then your collections reduce, then you raise the rates. Could you not foresee these problems when you were trying to get on to the populist bandwagon. Is this the way modern states are run? Let’s see what the proposals are, agenda hasn’t come as of now. Will make the suggestions at the Council meeting,” Badal told The Indian Express.
Badal further said, “Will certainly ask government of India that if we can look at GST afresh and unless we do it, this is just fixing with punctures, this tyre is not going to run. It will take 2-3 months, we will fix it. It’s nothing which is not fixable but the present design is very bad design.”
Bihar FM Sushil Kumar Modi is of the view that the scope to increase rates is very “limited”, especially of exempted items and 5 per cent slab. “A concrete proposal has to come for me to comment more. But as of now, the scope to increase rates is very limited. Making changes in the lower slab of 5 per cent is not going to yield much revenue. This is a sensitive issue and all states need to be on board. It is to be seen what will help in raising revenues without hurting the sentiment of the common man. Every state would want that revenues should also go up, tax compliance improves and cess pool also improves,” he said.
Modi added raising tax rates in times of slowdown has a repercussion and maybe the states could consider bringing in more items under the ambit of cess or increase cess rates for existing items. “Not much scope to raise cess on automobiles, but maybe it can be increased for aerated drinks, tobacco. The revenue gap has to be filled…it’s not related to one state, every state wants compensation at 14 per cent. How to do it, what can be done, this is a difficult exercise. And increasing tax in time of slowdown also has a repercussion. This is a delicate issue,” he said.
State FMs said any such rate change exercise needs to be done slowly, with due inputs from officers and ministers of all states and after a thorough perusal by the fitment committee. States are of the view that hardly any luxurious or high-end items are there in the list of exempted items at present, so taking out items from that list may not be feasible.
Also, a merger of 12 per cent and 18 per cent slabs may not result in revenue gain on a net basis.
Kerala FM Thomas Isaac has spoken against tweaking rates for lower slabs and suggested tinkering with items in the higher slabs of 18 per cent and 28 per cent. “In the last GST Council meeting Union FC (Finance Commission) Chairman suggested states should revisit the compensation package in the context of decline in tax collection. All state ministers irrespective of politics rejected it. Now Centre is bringing it back to the agenda by forcing a dispute,” he tweeted.
Over 50 per cent of the total items are under the 18 per cent slab under GST, around 20 per cent are in the 12 per cent slab and about 23 per cent of the items are in the lower slab of 5 per cent. 25 per cent of the items are in the peak 28 per cent slab, while 13 per cent of the items are in the zero category. So far, the Council, since the GST rollout from July 1, 2017, has held 19 meetings in which it has undertaken around 10 rounds of rate cuts. Any rate hike decision would be the first such move under the indirect tax regime.