Debate Ignites Over Gadkari’s GST Letter to Nirmala Sitharaman: Insurance Tax and Rate Rationalization
By: Admin|August 06, 2024|Categories: GST Recent News
Nitin Gadkari, India’s Union Minister for Road Transport and Highways, has recently ignited a fresh debate regarding the Goods and Services Tax (GST) on health and life insurance. In a letter to Finance Minister Nirmala Sitharaman, highlighted by the Times of India on August 5, 2024, Gadkari advocates for a significant reduction in the GST rate, currently set at 18%. His concerns stem from the view that healthcare is a publicly funded responsibility, making the existing tax structure impractical.
The Case for Reducing GST on Insurance
Gadkari’s suggestion to eliminate the GST on health and life insurance has sparked discussions on the feasibility of such a move. Experts consider a complete removal of the tax impractical as it could disrupt the GST chain and complicate refund processes for insurers. However, there are compelling arguments in favor of reducing the tax rate to make insurance more accessible to the general population.
About six months ago, a parliamentary standing committee led by Jayant Sinha echoed similar sentiments, recommending a reduction in GST on health and term insurance. The high taxation on essential services raises concerns about their affordability, particularly in sectors like telecommunications, which also bear an 18% GST.
The Burden of High Taxes on Essential Goods
The current tax system imposes substantial levies on a range of essential services and goods. For instance, telecommunication services attract an 18% GST, while items like air conditioners and cement face a staggering 28% tax. Despite persistent calls for tax cuts and rationalization, the GST Council, comprising Union and state finance ministers, has not yet addressed these demands.
When examining the taxation landscape, the burden is particularly evident in the automotive sector. The GST for “luxury vehicles” exceeding 4 meters in length is a staggering 43%. Additionally, high registration and motor insurance costs contribute to the financial strain on consumers, with motor insurance also subject to an 18% GST. In contrast, sin goods, such as gutka and pan masala, bear tax rates exceeding 100%.
The GST Council’s Inaction and Future Plans
The GST Council has been deliberating rate adjustments for years, yet no substantial changes have been made, even as tax collections have increased. A comprehensive review of the GST structure appears to be months away. A ministerial panel led by Bihar’s Deputy Chief Minister Samrat Chaudhary will draft a blueprint, which will then require an extensive review by the GST Council secretariat. This review process aims to prevent any revenue loss that could arise from rate changes.
Rationalization of GST rates was initially planned a few years after the implementation of the GST, but progress was delayed due to the COVID-19 pandemic. Although finance ministry officials acknowledge the ongoing criticism surrounding high tax rates, they remain hesitant to take action, largely due to concerns about potential revenue losses among the states, particularly in light of the phase-out of the compensation cess.
Proposed Merging of GST Rates
One of the more significant proposals currently under consideration is merging the existing 12% and 18% GST rates into a median rate of approximately 15-16%. This adjustment would lead to a slight reduction in taxes for a variety of goods, including biscuits, ice cream, paints, refrigerators, and certain telecom services. However, it would also result in increased taxes on items like bicycles, clothing, and various food products.
To maintain revenue levels while narrowing the gap between the proposed median rate and the rate applied to merit goods, the 5% GST rate may need to be increased to around 7-8%. Notably, nearly two-thirds of total revenue comes from the 18% GST slab, with 15-20% derived from the 28% slab, while the 5% slab contributes minimally to the overall tax revenue. Discussions are also underway to potentially bring certain currently tax-exempt goods under the GST regime.
Timing for Rationalization
Former CBIC Chairman Vivek Johri has pointed out that this period presents an opportune moment for GST rationalization. With improved revenue, a stable economy, and easing inflation, there is a strong case for simplifying the tax structure. Tax experts emphasize that rationalizing GST rates could not only enhance compliance but also lead to increased tax collections.
Future Cess Planning and Challenges Ahead
The GST Council must also consider planning for cess on a variety of products, including tobacco, pan masala, automobiles, coal, and soft drinks. However, the process of rationalization is fraught with challenges. For instance, if the GST on insurance is reduced to the lowest slab, it could result in higher levies on inputs and create complicated refund processes.
Conclusion
Nitin Gadkari’s recent advocacy for reducing the GST on health and life insurance has sparked a critical discussion on tax rationalization in India. While the complete removal of GST may be impractical, the need for a reduction is backed by strong arguments from various sectors. The ongoing debate highlights the importance of addressing high tax rates on essential goods and services to improve accessibility and affordability for the average citizen.
As the GST Council continues to deliberate, it remains crucial to find a balance between maintaining revenue and simplifying the tax structure to foster economic growth. The time for comprehensive tax reform may be upon us, and stakeholders from all sectors must remain engaged in this vital conversation.
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