GST Council does well to cut rates of Covid essentials. Issues of compensation, rationalising of rates, also need to be examined.
The economic shock of the first wave of Covid-19 and a harsh lockdown has been worsened by the second wave.
In its meeting on Saturday, the GST Council cut tax rates for key Covid-related medicines and equipment in line with the recommendations of the Group of Ministers (GoM) formed to go into the issue. While frequent changes in tax rates create uncertainty for businesses and households, doing so now in the midst of a pandemic, for a limited time period, to provide relief to financially stressed households struggling to meet their health expenses, is a judicious move. While some had argued in favour of zero rating of these items, which is done for exports, doing so would have required an amendment to the GST Act. On the other hand, exempting these products from GST would have placed manufacturers at a disadvantage as they would not have been able to claim input tax credit.
Beyond the issues relating to the adjustment of tax rates, some states are also reported to have raised the question of the GST compensation period. A separate meeting has been called to examine this matter in detail. The five-year GST compensation period that was originally agreed upon as part of the grand bargain between the Centre and the states will end in June 2022. Considering that revenue from GST has fallen well short of expectations — the 15th Finance Commission had estimated that while indirect taxes subsumed under GST amounted to 6.3 per cent of GDP in 2016-17, GST collections (excluding the compensation cess) were only 5.1 per cent of GDP in 2019-20 — states, unsure about their revenues post June 2022, are likely to ratchet up the pressure to extend the compensation period. While the Centre is yet to clearly spell out its views, how this issue is navigated is likely to have far-reaching implications for the already fraught Centre-state relations.
Equally pressing is for the GST Council to address the problems that add complexity to and continue to plague the indirect tax framework. For one, the matter of the inverted duty structure needs to be addressed. Perhaps a product-wise examination needs to be considered. And while this may not be an appropriate time, the GST Council must also examine the issue of rationalising the tax rates. According to an RBI study, the weighted average GST rate had declined from 14.4 per cent in May 2017 to 11.6 per cent in 2019, implying that the current GST regime is not revenue neutral. This impacts tax collections, and creates fiscal pressures for both central and state governments. Such pressures are exacerbated during economic downturns when there are greater demands on governments to provide relief to the economy. The GST Council must, therefore, move quickly to address the lingering structural issues in the GST architecture.