GST rate rationalisation gets tricky for NDA 3.0

By: Admin
June 12, 2024
Categories: GST Recent News
4 Min Read

A reduced mandate in the Lok Sabha elections may potentially tie the BJP led government’s hand in implementing GST rate rationalisation, analysts said. According to them this would adversely impact the poorer sections, something the government can ill afford at this juncture. While a group of ministers (GoM) is expected to consider the possibility of rationalisation of GST into three slabs from the current four slabs, experts said that any lowering or tweaking of GST rates on semi essential items which are taxed at 12 percent or 18 percent could lead to additional tax burden on essential items, which are taxed at a lower five percent rate.

Sources close to the development told Moneycontrol, requesting anonymity, that they believe the rate rationalisation won’t happen anytime soon due to its potential negative impact on lower-income groups.

How this comes into effect is yet to be seen. The larger question for the government to mull over, especially after the election results, is if this would create dissatisfaction to rural or lower sections of the economy. This remains to be clarified in the 53rd GST council meeting.

Currently, essential and semi-essential goods, which constitute 70-80 percent of India’s consumption, attract a GST rate of five percent or 12 percent. However, sin goods or luxury items are taxed at 28 percent, contributing significantly to government revenue. “…it’s like a cross subsidy, if rates are rationalised, government’s revenue may take a hit, but more than that, lower income groups will be impacted,” sources stated.

The group of ministers (GoM) for GST rate rationalisation, reconstituted on November 1, 2023, and led by UP Finance Minister Suresh Khanna, are yet to finalise recommendations on the same. In an interview last year, the Central Board of Indirect Taxes and Customs (CBIC) Chairman Vivek Johri told Business Today TV, that the aim is to streamline the current rates of five percent, 12 percent, 18 percent, and 28 percent into three rates.

The GST Council, during its 45th meeting held on September 17, 2021, decided that a Group of Ministers may be formed to look into matters related to rate rationalisation and correction of inverted duty structure. This GoM was earlier constituted headed by Basavaraj S Bommai, CM Karnataka, but was reconstituted when he lost the assembly election in the state.

Reduction in the number of rates to three would lead to consolidation of any two slabs—either eight percent – median rate of five percent and 12 percent; or 15 percent – median rate of 12 percent to 18 percent.

“At eight percent there would be more challenges, for example, edible oil may go from five to eight percent and that would impact a large set of the economy. This would create dissatisfaction majorly in the lower sections of the economy,” an expert explained.

In another example, services such as telecom and consulting services attract 18 per cent GST. If the rate on these or goods charged at 18 percent is rationalised to 15 percent, the government might lose a good share in their revenue. And to compensate for the same, one possible option would be to increase the 12 percent rate to 15, and those will most likely be semi essential goods/ services. The segment that has to pay higher tax would suffer. The consumption may go down for those goods/ services sectors, and it may add to inflation for those sectors, according to analysts.

Role of states

In the GST Council, the Centre retains one-third of the votes, while the states collectively hold two-thirds. While voting would not be impacted, states will have significant influence on policy decisions, especially considering their consumption pattern.

“The government might not go for consolidating four rates into three rates immediately, but move items from one category to another, for a more gradual change. Here, the regional parties in the states can be expected to assert their influence in terms of lowering rates in categories depending on their consumption pattern,” the sources said.

Highlighting the impact on India Inc, another expert warned that this reclassification will cause big waves in the market. Ultimately the market will get into a reset mode if this happens and will have large-scale implications in terms of ease of doing business.

Need GST rate simplification for more objectivity

Globally GST is a single rate regime in most jurisdictions, however, in India there are four tax slabs in addition to cess and special rates such as 0.25 percent, 1.5 and three percent. In some cases GST is nil like grains, salt, jaggery; while bread, fresh fruits, milk, curd are exempted. Supplies made overseas and to Special Economic Zones (SEZs) or SEZ Developers come under the zero-rated supplies and can apply for input tax credit

Petroleum products such as petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel and electricity have been kept outside the purview of GST at present.

This was a result of extensive deliberations by the government considering the disparity in population and socio economic factors. Even though it was tackling the disparity in the federal state, the multiplicity of taxes has led to inverted tax duty classification issues, with similar kinds of items in different states being taxed differently and interpretational issues leading to legal disputes. Tax experts and industry leaders have demanded simplification of the GST time and again.

The simplification process is further complicated by the anomalies in tax rates for similar products, as highlighted in various classification disputes, especially when the tax rates depend on factors such as packaging. For example: while jaggery attracts nil GST, pre-packed and labeled jaggery is eligible for GST at five percent.

A recent example of issues arising out of classification includes the Gujarat Authority of Advance Ruling’s (GAAR) decision to tax pre-mix flour for ‘idli’ and ‘dosa’ at 18 percent instead of the 5 percent on ‘sattu’. GAAR reasoned that ingredients to make ‘instant flour mixes’ are not covered under the relevant GST rules as in the case of ‘sattu’.

“There is a lack of certainty and predictability –too many tax rates lead to tremendous compliance-related problems. It is time to simplify the GST rates to a three-slab structure to make it easier to do business and reduce litigations arising from classification disputes,” he said.

The GST classification system can be complex due to the multiplicity of tax rates applied to different products. For instance, sealed drinking water bottles are taxed at 12 percent, while natural or artificial mineral water bottles face an 18 percent tax. In this context, there has been debate over how to classify ‘Gangajal’ for taxation.

Roti is taxed at five percent, but Paratha/Parotta attracts an 18 percent GST. Raw meat is taxed at five percent, but prepared meat is taxed at 12 percent. Popcorn is taxed at 18 percent, while namkeen is taxed at 12 percent. Mosquito repellents attract an 18 percent GST, whereas medicaments have a 12 percent tax. All these examples are from disputes where AAR ruled on the interpretation of tax rate.

“Classification disputes are very common under GST,” he said. Such rate ambiguities are a cause of tax uncertainty for businesses. “Reclassification of such similar products which have varied rates like five, 12, 18 percent prescribed, would really help provide certainty to businesses and reduce interpretational issues,” he added.

Source from: https://www.moneycontrol.com/news/business/gst-rate-rationalisation-gets-tricky-for-nda-3-0-12745403.html