EXPLAINER | India's tax crisis: Why GST needs rationalisation?
When the GST was implemented in 2017, there were over 200 items which were in the 28% tax slab, but subsequently the rates on many of these items were cut to 18% or less.
NEW DELHI: As the Goods and Services Tax (GST) enters its fifth year, it is probably time for one of the biggest overhauls in the new tax regime – the rata rationalisation.
The GST Council has been procrastinating on the issue because of pandemic, but now that the pandemic looks to be on the wane, the Council has formed a Group of Minister (GoM) to initiate discussions on the issue.
The GoM has a four-pronged strategy — to review the list of goods and services exempt under GST with the objective of expanding the tax base; review the instances of inverted rate structure and recommend suitable rates to eliminate the inverted duty structure; review the current slabs and recommend changes; and review the current structure and recommend rationalisation measures including merger of slabs.
The GST council had formulated a four-slab rate structure — 5%, 12%, 18% and 28%.
Add to this, 0% exempt category and 3% on gold and additional cess charged on certain products, today we have effectively a 7 tax-slab structure, making it too complicated and also less effective when it comes to the quantum of collection.
The realisation that the collection from GST is much lower than expected had dawned upon the government a couple of years back as compensation requirements for states keep exceeding the collections from Compensation Cess.
This necessitated the GST Council to have a look at rate rationalisation.
Collection falling short
At a press briefing after the GST Council meeting in Lucknow, Finance Minister Nirmala Sitharaman had said the Revenue Neutral Rate prescribed at the time of implementation of GST was 15.3%.
But the weightage average GST rate currently is only 11.6%. The Reserve Bank of India (RBI) in its analysis in 2019 had said that since the rollout of GST, the rate changes have brought down the tax incidence from 14% to 11.6%.
So, the new tax regime started with a lower GST incidence of 14% instead of the prescribed revenue rate of 15.3%. Later amidst public outcry over ‘high’ GST rates, the government had to further reduce rates.
When the GST was implemented in 2017, there were over 200 items which were in the 28% tax slab, but subsequently the rates on many of these items were cut to 18% or less. Currently, only 37 categories of items are in the 28% slab.
As a result, the government failed to collect GST as much as it expected and had to continuously cut down its budget expectations. In 2018-19, the central government had budgeted for Rs 7.44 lakh crore through GST (in Centre’s kitty), but it could collect only Rs 5.8 lakh crore. In FY20, it had a moderate target of Rs 6.63 lakh cr, but collected only Rs 6 lakh crore. The 15th Finance Commission in one of its reports noted, “The available numbers indicate that GST buoyancy during 2017-2020 was less than that of subsumed taxes during 2011-2017.”
And it cited many reasons that contributed to this – one of those being “successive reduction in tax rates and the consequent compromise of the revenue neutrality of GST rates have also affected the revenue performance”.
As the GoM on rate rationalisation has the mandate to suggest changes as well as suggest a roadmap for changes to be adopted in the short and medium term, we asked some experts what these changes should be and what their impact would be.
MS Mani, partner, Deloitte India, says: “As GST is now in its fifth year, it is an opportune time to consider fewer rate slabs and eliminate inverted duty situations completely — the GOM formed recently should consider the views expressed by industry bodies on the reforms required in GST.”
Some of this may have already started. In its 45th meeting, GST Council decided to increase GST on ores of iron, copper, aluminium from 5% to 18%; on specified renewable energy devices and their parts from 5% to 12%; on cartons, boxes, bags from 12% to 18%; and on parts and locomotives from 12% to 18%. GST on licencing to broadcast films also increased from 12% to 18%.
Many of these hikes are part of the policy to correct the inverted duty structure, under which the tax on inputs is higher than the GST on output.
GST rate changes in order to correct inverted duty structure, in footwear and textiles sector, would be implemented from January 1, 2022.
The rate rationalisation does not necessarily mean an increase in GST rates across the board, though.
“I am in favour of pushing up all low rates and pushing down all high rates to achieve a uniform low single rate,” says Ajay Shah, an economist and a former professor at the National Institute of Finance and Policy.
He says that it would be a shot in the arm for the economy to do something like an 8% or 10% single rate GST.
Tushar Agarwal, founder partner at CA firm Tattvam Advisors, is not in favour of exemptions under GST as they come with the cost of blocking ITC and thus causing higher input tax for businesses.
“Hence, the requirement is for reduction and rationalisation of GST rates in specific sectors and not for complete exemptions to ensure that revenue losses are minimised and leakages are avoided,” he says.