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Journalism of Courage
As the Goods and Services Tax (GST) authorities set out to chart the future roadmap of the indirect tax regime, seven years after its implementation in July 2017, the biggest question in the minds of stakeholders is — can it be simplified further? A less-complex GST structure essentially would imply a reduction in the number of tax slabs, minimal carve outs and exemptions, easier compliance mechanism and rates at a level at which both states and the Centre are able to safeguard their revenue streams.
The trigger for the most recent discussion on the continuing complexity of the GST structure was when D Srinivasan, the Managing Director of Coimbatore’s Annapoorna Hotels, cracked a joke about the “absurdity” of GST rates at an industry meeting with Union Finance Minister Nirmala Sitharaman on Wednesday, which later led to a political storm between the BJP and opposition leaders. “The problem is that GST is applied differently to each item. For example, there is no GST on a bun. If you put cream in it, the GST becomes 18 per cent. Because of this, customers now say they want the bun and the cream separately so that they can apply the cream themselves to save money,” he had said.
Then, for some of the items like cosmetics and toiletries such as shampoo and soaps, the rates differed at the time of the GST rollout in 2017. While shampoos and body wash were classified in the 28 per cent tax slab, soaps were at 18 per cent.
At multiple times over the course of the last six years, the GST Council has worked towards clarifying such discrepancies in the rate structure. The rate on shampoos, body wash and soaps were later in November 2017 bracketed together in the 18 per cent slab.
In another instance, the GST rate for food and beverages such as popcorn, cold drinks etc sold at cinema halls had to be clarified by the GST Council in July 2023. While some cinema halls were charging a 5 per cent GST rate for food and beverage served at their premises, at par with the 5 per cent tax rate for standalone restaurants, several local bodies and states had raised questions whether these services could be treated the same as restaurant services. The Council discussed the proposal last year and decided that the food or beverages served in a cinema hall is taxable as restaurant service (5 per cent) as long as the food or beverages are supplied by way of or as part of a service, and supplied independent of the cinema exhibition service.
In cases, where the sale of cinema ticket and supply of eatables such as popcorn or cold drinks etc. are clubbed and sold together, then such bundled supply becomes a composite supply, and the entire supply will attract GST at the rate equivalent to the principal supply — movie ticket. Movie tickets up to Rs 100 are charged 12 per cent GST, while tickets priced over Rs 100 attract 18 per cent GST.
Way forward
At a time when the average monthly gross GST collections have stabilised around Rs 1.8 lakh crore with a year-on-year growth rate of 10 per cent, most stakeholders are reluctant to undertake any major change in the rate structure. State and central government officials said it would be mainly a political call rather than an economic call to tweak rates at this point of time. Consumer-centric items, however, are in the focus at the Council.
For example, the contentious proposal of reducing rates on health and life insurance premiums was discussed in the recently held GST Council meeting on September 9. While most members were aligned to reduce the rate on insurance premiums, it was decided to expand the scope of the existing Group of Ministers (GoM) on rate rationalisation with a time bound mandate to carry out a review. The GoM has been asked to submit a report by October, following which the decision would be taken by the Council in its November meeting.
The other consistent demand to compress the existing tax slabs — 0, 5, 12, 18 and 28 per cent — into a three- or four-slab structure is also being discussed. Some members of the GoM on rate rationalisation such as West Bengal and Karnataka in its first meeting held last month had stated the need to maintain status quo with respect to tax slabs. After last week’s Council meeting, however, Sitharaman said that restructuring of slabs is also on the discussion table.
The ideal solution could have been to have a flat rate with no exemptions or carve outs as is the case in many countries such as Singapore and New Zealand. This was raised during the initial discussions at the time of the rate setting exercise before the GST rollout in India but it was viewed to be complicated for a country with a variety of products like India.
Even the then Finance Minister Arun Jaitley had said that a single rate is a “flawed idea” and then pointed out in June 2018: “Should we have the same rate for food items, hawai chappals and BMW cars?” In December 2018, Jaitley had said that as revenue would 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 per cent and standard rate with luxury and sin goods as an exception,” he had said.
There could be other possibilities also to bring in uniformity in the GST rates. Former Central Board of Indirect Taxes and Customs (CBIC) Chairman Najib Shah said that merging of rates would be challenging but if there is consensus that it has to be done, then options are many — either it could be merged chapter wise or the rates could be converged. “For instance, confectionery items could be at one rate, irrespective of whether it is a simple bun or with an add-on and that rate may not be necessarily nil. It could be 5 per cent or whatever is the median rate. This would, however, militate against the concept of taxing value addition. Or we could collapse the two rates of 12 and 18 to a median rate, say, 15 per cent. These are various options possible. The rates were arrived at after analysing the weighted average of states and central excise, and service tax rates in a fairly scientific and logical manner and the cost-benefit analysis has to be seen,” he told The Indian Express.
Under GST, every item is classified through a HSN (Harmonised System of Nomenclature) code and there are 99 chapters classifying similar items under one chapter. However, every item may be facing a different GST rate. For example, GST on biscuits is 18 per cent, on rusk is 5 per cent, whereas bread faces zero GST.
It is these simple, B2C items that experts feel should get some relief from GST authorities going forward. “B2C items sold in retail to consumers by smaller manufacturers could be looked at and there could be a rejig of GST rates for such items. These are unlikely to result in a significant revenue loss also. At some point, the equivalence principle would need to be applied to similar B2C items,” MS Mani, Partner, Deloitte India said, he said bakery items could be clubbed together with a valuation threshold for the premium segment products.
Experts are also of the view that formation of industry-specific committees of officers, as was done during the initial rollout phase of GST, may now help the GST authorities to understand the finer details of the issues being faced by businesses across sectors. “The government’s efforts to address ambiguous tax positions and promote tax certainty are commendable, but larger policy changes could further simplify compliance and ease business operations. Centralized audits and assessments could alleviate a major industry challenge — multiple authorities adopting varied tax positions and reviewing the same issues. A central system, along with industry tax position papers, could enhance ease of doing business and tax certainty,” Abhishek Jain, Indirect Tax Head & Partner, KPMG said.
Proposals to merge 12 and 18 per cent slabs or 5 and 12 per cent slabs have featured in internal discussions of the GST authorities. However, concerns about a potential loss of revenue through any major change in tax slabs looms large.
“A change in slabs will not happen immediately. Around 70 per cent of the GST revenue is coming from 18 per cent tax slab. Even a 1 percentage points reduction in the 18 per cent rate to 17 per cent would result in a 3.5 percentage points reduction in revenue. So the change in slabs is not going to be easy,” a senior government official had told The Indian Express last month.
Such rate change discussions are expected to happen item-by-item and make a comparison of the current rates with the revenue neutral rate. The concern of maintaining revenue neutrality has weighed on such discussions of rate changes earlier as any major rate change for items or tax slabs under GST would imply loss of revenue for both states and the Centre. Any indication of a deceleration in revenue growth due to any tinkering of the GST rates, at a time when many southern states are already asking for a greater share of revenues under the Finance Commission mechanism, is not going to be easily agreeable to states.
Revenue neutrality is seen as a crucial factor as a study by the Reserve Bank of India (RBI) had earlier shown that while the Chief Economic Advisor’s report had pegged the revenue neutral rate at 15.3 per cent, the weighted average GST rate stood at 14.4 per cent in May 2017, and subsequently dropped to 11.6 per cent by September 2019. The current weighted average GST rate has dropped even lower than the 11.6 per cent level seen earlier, officials said.
