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With a tight timeline for implementing the next-generation reforms under the Goods and Services Tax (GST) regime by early October, the 56th meeting of the GST Council will be held for two days beginning September 3. A meeting notice issued late Friday by GST Council and signed by Revenue Secretary Arvind Shrivastava, who is the ex-officio secretary of the Council, also stated that the meeting of officers’ of states and Centre will be held on September 2, a day before the Council’s meeting.
The Council’s meeting comes after chief ministers, finance ministers and other ministers from states had come to the Capital to participate in the meetings of the Groups of Ministers (GoMs) over the last two days. While the ministerial panel on rate rationalisation gave its in-principle support for the GST overhaul proposal this week, the item-by-item discussions will now take place during the two-day meeting of the GST Council in September.
The GST Council, headed by Union Finance Minister Nirmala Sitharaman and having representatives from 31 states and union territories including Delhi, Puducherry and Jammu & Kashmir, will discuss the proposal that seeks to reduce tax rates for common-use items and for public welfare services such as health and life insurance for individuals that is likely to be exempted.
States have already raised two key concerns — whether there will be any institutional mechanism to compensate states for revenue loss; and whether the benefits from GST rate cuts will percolate to the ultimate beneficiary – the common person. States are expected to raise these concerns in the upcoming GST Council meeting as items under various slabs get discussed threadbare.
Seven days ago, Prime Minister Narendra Modi, in his Independence Day address, had announced the next big phase of reforms under the GST regime by Diwali, a gift for the common man, small entrepreneurs and MSMEs, in terms of reduced tax burden. The Centre has suggested replacing multiple slabs – 5 per cent, 12 per cent, 18 per cent and 28 per cent – with a broad two-slab structure – 5 per cent and 18 per cent – in addition to a 40 per cent special rate for sin and demerit goods.
Over the last two days, on August 20-21, states’ ministers, chief ministers and finance ministers converged in Delhi to discuss the Centre’s GST overhaul plan. On August 20, Finance Minister Sitharaman addressed the Groups of Ministers (GoM) constituted by the GST Council on compensation cess, health and life insurance, and rate rationalisation.
Two meetings of GoMs were held on the first day — compensation cess & life and health insurance. All members broadly agreed with the proposal to make the GST rate nil on health and life insurance for individuals from the current GST rate of 18 per cent. Some states raised concerns about the possibility of benefits from GST cuts on insurance being pocketed by companies, while some others asked about the impact on state government health insurance schemes. Annual revenue loss from GST exemption on insurance for individuals is seen around Rs 9,700 crore.
On the second day, August 21, the GoM on Rate Rationalisation held its meeting and gave its in-principle support to the Centre’s GST overhaul proposal. States said they do not oppose the “pro-people” proposal, but it may result in revenue losses that will ultimately leave them with less resources to spend on common people in their regions.
States said they are “okay with the pro-people proposal” but the proposal should not move ahead without detailing a mechanism for compensating states for revenue loss. While the GST overhaul plan entails removal of 12 per cent and 28 per cent slabs, states’ revenue loss concerns stem mainly from the proposal which would see most items such as white goods, small cars shift to 18 per cent from the existing 28 per cent slab. The Centre plans to introduce a special rate of 40 per cent, subsuming compensation cess levy, which will apply only to 5-7 sin, demerit and luxury items.
Some states have also suggested amending Section 9(1) of the GST law to allow for an additional levy going beyond the current cap of 40 per cent (20 per cent Central GST (CGST) plus 20 per cent State GST (SGST).
The differing views and observations of states on revenue loss and concerns over possible profiteering by manufacturers and companies will be part of the note that the GoM on Rate Rationalisation will send to the Council along with the Centre’s proposal.
The proposed GST reforms are expected to boost consumption as the tax rates on goods such as refrigerators, air conditioners and packaged and branded food items like fruit juices, butter, cheese, condensed milk, nuts, dates and sausages, and medical items including medical grade oxygen, gauze, bandages, diagnostic kits are likely to be cut. As per the proposal, 99 per cent of items in the current 12 per cent slab are set to be moved to the 5 per cent slab, while 90 per cent of goods and services currently at 28 per cent would shift to the 18 per cent tax slab.
Common-use items will continue to be in the zero or 5 per cent slab, while a standard rate of 18 per cent will apply on other goods. Sin, demerit and ultra-luxury items will attract a 40 per cent rate.
The proposed GST overhaul is also likely to bring relief to those looking to buy cars, especially smaller cars, with the government looking at creating a distinction in tax rates for smaller and bigger cars. Small cars, which currently attract 28 per cent GST plus small cess rates of 1-3 per cent, could get moved into the 18 per cent bracket in the new dispensation, while bigger luxury cars and SUVs are likely to be shifted into the special rate category of 40 per cent.
However, there might be an additional levy to maintain the current tax incidence on sin goods. For instance, tobacco, a sin good, will continue to face the same tax incidence of 88 per cent that exists today as Centre is likely to propose additional excise duty levy over and above 40 per cent. For other luxury items, such as bigger SUVs and luxury cars, there could be an additional levy beyond 40 per cent but that would require a legal amendment in the GST-related laws.
