The Prime Minister’s announcement of ushering next generation reforms by Diwali seemed very optimistic. But the Group of Ministers (GoM) have swiftly endorsed and recommended the proposal of two slabs of 18% and 5% with 40% for some select commodities to the GST Council. This would make what appeared possible highly probable. This is good news for it gives the Centre time to fine tune the proposal and convene a Council meeting early. The focus in the GST Council meeting will of course be on which items and services will move to different slabs. But the underlying concerns will be the impact on consequential revenue — for though the GoM has recommended the proposal it is clear from the subsequent press briefings by the State Ministers that there are serious concerns about revenue. A SBI research paper suggests that the weighted average of the GST rates is likely to fall to 9.5% from 14.4% with an average annual revenue loss of about Rs. 85,000 crores. This is substantial and States will need some more persuasion than merely being assured that a spurt in consumption will offset the effects of the reduction. However, a broad back-of-the envelope calculation would suggest other things being the same, revenue should not do too badly. FY 2024-25 saw a total of Rs. 22.08 lakh crore of GST revenue .65% of the total revenue comes from the 18 % slab. It is not clear how many of the goods and services in this slab will go down to 5%; 99% of items from 28% are said to be moving to the 18% slab. Assuming that the movement of goods from 18% slab to the 5% slab will be offset by the movement of goods from the 28% slab to the 18%, the revenue from this slab should not get seriously impacted. 11% of the revenue is said to come from the 28% slab-the hike to 40%, the maximum permitted under the GST at present (the West Bengal Finance Minister has suggested that this restriction needs to be lifted) can offset this loss from the erstwhile 28%. 5% of the revenue is said to come from the 12%— which slab will cease to exist which would suggest a boost to the revenue from the 5% slab.
There is no proposal to change the rates for precious metals and precious stones/diamonds. All this is of course speculation — and the GST council will need hard numbers to get convinced. It should not be forgotten that in the immediate future revenue will be severely impacted. Consumers will not splurge in the days leading to Diwali waiting to see the actual reduction in rates and the impact on prices. It will be interesting to see how the Council handles the levy on cigarettes. This is a commodity which is currently subject to a GST component, a basic excise duty (BED), compensation cess split between an ad valorem rate and a specific component and a national calamity contingent duty (NCD). This translates to a 28% GST, 5% excise duty, NCD ranging from Rs 230 to Rs 850 depending on the length of the cigarettes and a cess— both ad valorem of 5% to 36% and specific ranging from Rs. 2076 to Rs 4170 again depending on the length. From the quantum of duty which this product bears it is clear that this is by far the most ‘sinned’ of the goods. Health concerns and the consequential economic costs have always been at the back of the minds of tax administrators as much as the significant amount of revenue tobacco products generate (estimated to be upward of Rs 80,000 crore). The aim should be to ensure that the total burden of taxation on cigarettes should be the same post rate rationalisation. One way in which the government can ensure this is by increasing the specific duty element —there is certainty of revenue and the chances of undervaluation which high duty paying products sometimes resort to can be obviated. This will also ensure that an amendment of the 40% ceiling will not be required. This will also be an opportune moment to capitalise on the reform momentum and seriously look at bring some petroleum products within the GST fold. The benefits of doing so have been discussed often with no conclusion thus far. The Finance Minister’s tweet also spoke of two other critical pillars which have not got the attention they deserve in the din of the discussions about reduction in slabs— Structural Reforms and Ease of Living. The GST council needs to deliberate and focus on these critical pillars too. With the proposed reduction in slabs, there will be a serious problem of inverted duty structure. For instance, there is speculation of health insurance coming from 18% to 0%. The industry is already talking of the consequent inability to take any credit which will impact them-obviously it is a case of too much of a good thing! This issue will run across sectors and need careful calibration of rates—and an effective mechanism to ensure refund and if necessary to ease the law on such refunds which presently is available with conditions. Stability and predictability are another of the sub-pillars. Tax administrators across the Centre and the States should be aligned with the larger objectives of policy— they cannot work at cross purposes; they cannot indiscriminately issue headline catching notices on shaky legal foundations. There is an urgent need for a national advance ruling authority to address the issue of conflicting rulings given by the State advance ruling authorities. The GST Tribunal needs to start functioning. Ease of living would require that refunds— be it of accumulated credits or otherwise are given in a time bound manner. Simplification of processes beginning with registration should be a constant exercise. Both GSTN and the industry will face challenges in implementing these large changes and need to be given time to ensure smooth implementation. Tax administrators should be regularly trained to handle the taxpayers as equal partners in the country’s growth. The best of tax policies can fail in the hands of a cussed administrator. —The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views are personal.
Source link
