In its meeting held on November 9/10, 2017, GST Council has brought about a major restructuring of GST architecture. It has moved 180 items from the 28% slab [178 to 18% and 2 to 12%] leaving only 50 items in the highest slab. Besides, there has been some shuffling of items in other slabs: 19 items from 18% [13 to 12% and 6 to 5%]; 8 items from 12% to 5% and 6 items from 5% to zero.
The exodus of items en mass from the 28% slab – a large number of these being items of common use such as detergents, soaps, shampoos, chocolates, nutrition food etc shows that there was something fundamentally wrong in designing architecture in the very first place. The Council created multiple slabs viz. 0, 3%, 5%, 12%, 18%, 28% besides cess on demerit items [tobacco products, luxury cars etc] falling in highest slab. The ball did not stop here.
For any given item, the applicable rate varied depending on its value [e.g. apparel costing more than Rs 1000/- attracts 18% whereas, for price less than this, tax is 5%]. Then, there were a host of other distinctions such as branded versus unbranded food; non-AC versus AC restaurants; differentiation of hotels depending on tariff; economy versus executive class in trains and air travel etc.
Likewise, with respect to compliance requirements, the Council created discrimination between businesses who opted for ‘composition scheme’ [under it, an entity with turnover below a threshold has to pay tax at flat rate 1%/2%/3% for traders/manufacturers/restaurateurs] vis-à-vis others. While, former were required to file quarterly returns, latter were to do it every month [that too 3 times].
This highly differentiated tax structure is bound to be susceptible to discontent and heart-burning among stakeholders depending on the slab in which items of their interest falls. This is precisely what has manifest in a spate of representations from industries which were falling in the higher brackets especially 28% and small businesses due to onerous compliance procedures.
The Council has met a number of times to undertake restructuring [a big rejig happening in November 9/10 meeting] to provide relief to affected industries and businesses. It has permitted all entities with turnover up to Rs 1.5 crores – irrespective of whether under composition scheme or not – to file quarterly return. For those under composition scheme, the threshold limit has been changed twice.
The matching of invoices [albeit for sale and purchase] crucial to ensuring that all transactions are captured has been deferred. Businesses have been allowed more time to file return and penalty for delay reduced. The implementation of e-way bill has been deferred till March 31, 2018. Exporters have been given time till end of current fiscal to fully come on board with GST dispensation.
The process of change, adjustments and re-adjustments is unlikely to settle down too soon as several anomalies still remain [e.g. cement continues to stay in 28% slab]. A cobweb like situation has developed to disentangle from where it is going to be a daunting task if not impossible. It is important to understand as to why the federal body [read: Council] got entangled in it.
GST is a transformative reform. It has the potential of yielding huge revenue gains by boosting growth in GDP [gross domestic product] on the one hand and taxing billions of transactions which were earlier out of the tax net on the other. The objective could have been achieved by having a ‘single’ and ‘uniform’ nation-wide tax.
A committee set up by 12th Finance Commission under Dr Vijay Kelkar had recommended a single GST @ 12%. A panel under chief economic adviser [CEA], Dr Arvind Subramanian had proposed a 3-tier structure viz. 12% for essential goods, 40% for de-merit goods and standard rate of 17-18% on all remaining goods.
Without doubt, there was an urgent need for putting in place a simple tax regime – ideally one rate or 3 at the outer limit. But, the Council decided to use the existing tax regime as building block for the GST architecture. Thus, it calculated cumulative tax say ‘X’ [excise duty plus VAT] under extant regime for individual items or a class of items and placed them in the nearest slab. For instance, if X comes to 30%, the said item will fall in 28% slab. Considering that under subsisting dispensation, the tax incidence varied widely, multiple slabs were needed to accommodate all items!
Apart from the flawed linkage, things have been complicated by the pressure from states to protect revenue they would have got if existing system were to continue. So, they demanded full compensation for the loss if any, and the centre agreed. This not only led to high tax rates but also cess on demerit items aimed at creating a dedicated pool of resources to meet the compensation demand.
The centre also acquiesced to the states demand for virtually excluding crude, gas, petrol and diesel by keeping them zero rated under GST. This meant that even as oil and gas companies continue to charge excise duty and VAT, they won’t get credit for duty paid on purchase of their inputs including equipment, machinery etc. The uncovered input tax credit would result in a staggering loss [estimated to be about Rs 25,000 crores] to public sector oil companies alone. Likewise, exclusion of electricity leads to uncovered credit for power generation and distribution companies.
All of this viz. too many rate categories [some very high], cess, exclusions/exemptions, cumbersome requirements etc could have been avoided if only the union government and states had full faith in capability of GST to deliver. When, GDP growth gains by say 2% and billions of transactions [not taxed earlier] come under tax net, the increase in revenue can be monumental. But, they throttled realization of this potential by being utterly conservative. It was like a driver who remained stuck in 2nd gear little realizing that if he/she wanted to gain speed, he must necessarily shift to 4th/5th .
The Council needs to go on a correction course. In its meeting on November 9/10, it has brought about major changes. But, there is need for a fundamental transformation by drastically reducing the slabs to 3 initially and eventually to ‘SINGLE’ rate.