Rationalise rates, include petroleum products
Besides complicating the tax, it has created anomalies in terms of inverted duty structure on a number of items and has been a source of several classification disputes.
By M Govinda Rao
Tax reforms are best implemented when revenue buoyancy is increasing. Considering this, the setting up of a seven-member Ministerial Panel for rationalising the GST rate structure chaired by the CM of Karnataka does not come a day sooner. The economy has been registering steady recovery, and with the settled technology platform tax compliance in GST has been showing improvements (revenue collection from GST reached Rs 1.17 trillion in September, the highest in last five months).
The budget estimate of CGST (including central portion of IGST and excluding compensation cess) is Rs 5.3 trillion, and collections in the first half of the year works out to 50% of the budget estimate. With increased collections expected in the festival season, actual collection is likely to exceed the budget estimate if there are no disruptions. States, too, would have more robust collections of the tax, though it might require compensation payments. The recommendations from the panel are likely to receive traction from the GST Council and help to break the tyranny of status quo in rationalising the tax system.
The increase in buoyancy of the tax not only reflects economic recovery but also the firming up of the technology platform. There was a steady increase in monthly revenue collections since last October to reach Rs 1.4 trillion in April 2021 due to improvement in tax compliance following the stabilisation of the tech platform making it easier to detect the misuse of input tax credit. The Covid-19 second wave plunged revenue collections to Rs 1.03 trillion in May and Rs 0.93 trillion in June, before reaching Rs 1.17 trillion in September. With better technology and enforcement, and due to the pent up demand for consumption during the festival season, revenues are likely to improve. Also, the stable GST tech platform will help in better collection of income tax as well, due to the possibility of cross-verification.
The ostensible objective of the Ministerial Panel is to recommend measures to prune the exemption list and rationalise the rate structure to increase tax buoyancy while reducing anomalies arising from multiple tax rates. In the original design of GST, almost 50% of the items included in the consumer price index of low-income groups were exempted to minimise the inflation risk naturally narrowed the tax base. While pruning the list will broaden the base, a more holistic approach would be to make the tax more comprehensive by including petroleum products. Since these continue to be outside the ambit of the tax, it will be difficult to remove exemptions on services related to transportation of passengers and goods. At present, only air and first/AC train travel are subject to GST and all other travel-related services are exempt.
The implementation of GST is a work in progress. Based on international experience, Richard Bird and Pierre Pascal Gendron (Value Added Taxes in Developing Countries, Cambridge University Press, 2007) note that if some bad features like too high or too low thresholds, overly extensive exemptions, or multiple rates are included to ensure successful adoption of GST, it becomes extremely difficult to remove them later. In India, exclusion of petroleum products and electricity makes the tax only partial with significant cascading of central and state indirect taxes continuing to persist.
Multiplicity of rates has been a cause of concern. Besides complicating the tax, it has created anomalies in terms of inverted duty structure on a number of items and has been a source of several classification disputes. These have created hardships to both tax collectors in providing refunds and taxpayers, particularly the exporters in increasing the compliance cost besides getting refunds on time. Complaints about inverted duty structure in textiles, steel, electrical transformers and certain types of cement have long been pending. Conflicting advance rulings have complicated the issue. Thus, ready-to-eat food like chapatti and khakhra are subject to 5% tax, whereas paranthas are taxed at 18%. Catering and restaurant services in hotels with less than Rs 7,500 per day tariffs is 5%, whereas in those with higher rate is 18%.
The Ministerial Panel has the task cut out. First, it has to prune the exemption list and then analyse which of the items in the 5% category can be moved to the general rate. On the general rate, this is the right time to merge the 12% and 18% rates into 15%. This, in fact, is keeping with the roadmap that the previous finance minister had spoken about in December 2018 when he stated, “A future roadmap could well be to work towards a single standard rate instead of two standard rates of 12% and 18% … It could be a rate at some midpoint between the two.” The time is opportune for the panel to restructure rates to help economic recovery.
The ‘fitment committee’ has been structuring the rates mechanically taking into account the combined burden of taxes included in the GST and judgements regarding the incidence of the tax. At this juncture, it is important not just to see who consumes the good or service but what is the impact on income and employment.
Whether an item of consumption is a luxury or a necessity depends not just on who finally consumes it, but how much income and employment it generates. On this score, the panel would do well to bring down the rates on both construction materials and automobiles from the existing 28% to the general rate. This also calls for empowering the fitment committee with the capacity to model the implications of rate changes.
The author is chief economic adviser, Brickwork Ratings, and former director, NIPFP. Views are personal
Subscribe to FE Daily Newsletter for latest updates on markets, business, money, infra & more, right in your mailbox