Two-day GST Council meeting begins today, next-gen reforms in focus

Hailed as India’s biggest indirect tax reform since Independence, the reforms for the consumption-based tax are targeted across sectors such as agriculture, textiles, fertilisers, health, construction, transport, renewable energy, handicrafts and insurance. This is the first time that the Centre has outlined a rate rationalisation proposal under GST, with the Finance Ministry submitting its reforms plan to a Group of Ministers (GoM) that forwarded it then to the Council. The Centre’s proposal on GST reforms proposes replacing multiple slabs – 5 per cent, 12 per cent, 18 per cent and 28 per cent – with a broad two-slab structure – a merit rate of 5 per cent and a standard rate of 18 per cent – in addition to a special demerit rate of 40 per cent for sin and demerit goods such as pan masala, tobacco and cigarettes.

The proposal was first discussed in the meetings of the GoMs for compensation cess and rate rationalisation in Delhi on August 20-21 and will now be taken up for discussion in the GST Council. Central and state government officers have already discussed the proposal in their meeting on Tuesday, with most being onboard for the “pro-people” proposal.

The GST reforms proposal

The Centre’s proposal for GST reforms is based on three pillars — Pillar 1 of structural reforms involving inverted duty correction, resolution of classification issues and ensuring stability and predictability; Pillar 2 involving rate rationalisation by reducing taxes for common-use items and aspirational goods, reduction of slabs and subsuming compensation cess; and Pillar 3 for ease of living by streamlining the processes for registration, returns and refunds.

With the 12 per cent and 28 per cent slabs set to go away, 99 per cent of items in the current 12 per cent slab are proposed 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. The GoM on Rate Rationalisation had also discussed raising the lowest slab to 6 per cent from 5 per cent but it was decided that this may not be an appropriate time to hike it as it may impact prices of essential goods for the common person.

The proposal seeks sharp rate cuts for several white goods such as air conditioners, dishwashers and television sets to 18 per cent from 28 per cent.

Packaged and branded food items like fruit juices, butter, cheese, condensed milk, pasta, packaged coconut water, soya milk drinks, nuts, dates and sausages, and medical items including medical grade oxygen, gauze, bandages, diagnostic kits are likely to be cut to 5 per cent from 12 per cent. The GST rate for ultra-high temperature milk, chena or paneer, pizza bread and khakra, plain chapati or roti and education item of erasers is likely to be nil from 5 per cent at present.

Inputs for fertilisers such as sulphuric acid, nitric acid and ammonia are also likely to see a cut in rate to 5 per cent from 18 per cent, while renewable energy items such as solar cookers, solar water heaters and fuel cell motor vehicles including hydrogen vehicles may see a cut in tax rate to 5 per cent from 12 per cent. Coal is likely to see a hike in rate to 18 per cent from 5 per cent after the removal of cess on it.

In the textiles sector, items such as synthetic or artificial filament yarns, yarns of man made staple fibres, carpets and other floor coverings, woven fabrics of metal threads are likely to see a cut in rate to 5 per cent from 12 per cent. However, apparel and clothing accessories of value above Rs 2,500 a piece are likely to be see a hike to 18 per cent from 12 per cent.

Among services, individual health and life insurance is likely to be exempt from 18 per cent GST at present. Hotels with per day tariff rate of below or equal to Rs 7,500 are also likely to see a cut in GST rate to 5 per cent without input tax credit from 12 per cent with input tax credit at present.

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. As per the GoM’s own proposal, which is separate from the Government of India’s proposal, the GST rate for four-wheeled electric vehicles (EVs), other than electric buses, is proposed to be a higher rate of 18 per cent from 5 per cent for sale value between Rs 20 lakh to Rs 40 lakh. For EVs valued over Rs 40 lakh, the GST rate is proposed to be 40 per cent as against the current 5 per cent.

Online gaming, horse racing, lottery and casinos are likely to be taxed at 40 per cent as against 28 per cent at present.

With the compensation cess set to go away by October 31 after the repayment of back-to-back loans taken during the Covid period, the sin and demerit goods will face the 40 per cent GST rate. The tax incidence on sin goods will be maintained after the removal of the cess. For instance, Centre seeks to levy National Clamity Contingent Duty (NCCD) on tobacco and tobacco products to maintain the tax incidence which is presently around 88 per cent.

Issues in current GST structure, revenue loss concerns

The GoM report that outlines Centre’s proposal itself acknowledges that the current multiplicity of rates makes the tax structure complex which directly impacts the ease of doing business and trade and also impacts the cost of living of citizens particularly the poor and the middle class. There is also the plaguing issue of inverted duty structure — where the tax rate on output supply is lower than the tax rate on inputs. This affects the cash flow and working capital of businesses as they seek refunds for the accumulated input tax credit. Though the proposal will end the different rates for similar inputs and help ease the pressure points for businesses by correcting the inverted duty for major sectors, it might still be tough to completely eliminate it.

There is another key issue plaguing the GST system — classification disputes plaguing the GST system. Several classification disputes arose during this eight-year journey of the GST, especially in the food and automotive sectors because of the multiplicity of rates and differential rates for similar items. For instance, the GST regime has seen several disputes ranging from roti versus parotta to fryums versus papad to biscuit versus chocolate and coconut oil versus hair oil. The proposal now seeks to place similar goods in the same rate slab to avoid any such scope of disputes.

For registration, returns and refund, the proposal seeks to streamline the registration process by making it more technology driven and time bound especially for small businesses and startups. The return filing process stands to benefit as the plan seeks to implement pre-filled returns to reduce manual intervention and mismatches. Similarly, the refund process will be automated for faster clearance and automated processing of refunds for exporters and those with inverted duty structure.

There are concerns about revenue loss, especially from the states, in implementing the GST reforms proposal. As per slab-wise revenue data, the 18 per cent GST slab contributes the maximum revenue of about 73 per cent, while 28 per cent contributes 12 per cent. The 12 per cent slab contributes revenue of about 5 per cent, while the 5 per cent slab contributes 8 per cent revenue. Since the 12 per cent slab contributes the least revenue, it was felt that the slab can be done away with. The overall revenue loss from the GST reforms proposal is anticipated to be around Rs 70,000-80,000 crore, with the insurance exemption proposal itself estimated to result in an annual revenue loss of Rs 9,900 crore. However, the Department of Revenue in its internal calculations has suggested that the gross GST revenues may not be lower from the present levels. Though there might be an initial impact on revenues, the gains from higher compliance and consumption are expected to offset the losses.

States have, however, projected a revenue loss of between Rs 85,000 crore and Rs 2 lakh crore a year. States said they anticipate significant revenue reduction ranging from 15-20 per cent of the current GST revenues on account of the rationalisation of the current tax rates and the additional revenue foregone due to not merging the compensation cess fully into the GST rate structure. After a meeting held last week, eight opposition-ruled states in a joint statement expressed their unambiguous support for the pro-people proposal. But, they said states should be compensated for revenue loss – anything lower than 14 per cent revenue growth – for a minimum five years. For this, they are seeking an additional levy on sin and luxury goods, over and above the proposed 40 per cent rate, to maintain the current effective tax incidence. And, if there is any deficit after the additional levy, the Union Government should raise loans secured against the future receipts of the levy, states said. States have also raised concerns if the benefits of the rate rationalisation will actually reach the common people or lead to “windfall profits” for just a few companies.