*****GST’s next step — reforms: Good time to reduce slabs as tax mop-up is on an upswing | The Financial Express

Clipped from: https://www.financialexpress.com/opinion/gsts-next-step-reforms-good-time-to-reduce-slabs-as-tax-mop-up-is-on-an-upswing/2510813/

Currently there are four main slabs—5%, 12%, 18% and 28%. One option, reportedly being proposed by the tax authorities, is to merge the 5% and 12% slabs into an 8% slab.

To that extent, there could be some tapering off in the coming months as the economic recovery slows.To that extent, there could be some tapering off in the coming months as the economic recovery slows.

At Rs 1.68 trillion, the Goods and Services Tax (GST) collections in April, for sales in March, are remarkable and reflect the increasing formalisation of the economy, a good performance by the corporate sector, improved compliance, enforcement action against tax evaders. The rise can also be attributed to fiscal year-end activity and input tax credit being allowed only on timely compliance by vendors. To that extent, there could be some tapering off in the coming months as the economic recovery slows.

Nonetheless, with collections on an uptrend for many months now, this could be a good time to work on rationalising the GST structure even as the recommendations of the Bommai committee are awaited. While increasing rates in an inflationary environment might not be feasible, the GST Council must put down some timelines for a cleaner structure. Even if it is not possible to move to the two-slab structure as originally envisaged, in the immediate future, assessees are entitled to a timetable that is inflation-agnostic. The frequent revisions in rates are not just unfair to industry, they are also delaying a sound architecture for the GST.

Currently there are four main slabs—5%, 12%, 18% and 28%. One option, reportedly being proposed by the tax authorities, is to merge the 5% and 12% slabs into an 8% slab. Since the items in the 12% slab are relatively few in number, the loss of revenue would be minimal. To be sure, this can’t be done immediately since the 5% rate is applicable to essentials, and any hike in rates would hurt the poor. There is another school of thought that favours merger of the 12% and 18% slabs into one 16% slab. This could hurt revenues since various estimates put the collections from the 18% tax slab at close to 50%.

The divergence of views should, however, not delay the rationalisation process. Initially, it can be a three-slab structure, perhaps over two years, and a two-rate structure thereafter. Ahead of that, the granular data on GST collections needs to be made public. Disclosure must be made on which slabs and sectors are throwing up revenues so that the structure of the GST can be framed properly. At the end of the day, whatever the final construct, it should be designed logically with the objective of reaching a revenue neutral rate of 15.5%. So far, however, there have been only cuts in the tax rates and virtually no hikes. In November 2017, the GST Council decided to cut the tax rate on 178 items from 28% to 18%, leaving only 50 items in the highest tax slab. The reductions are estimated to have cost the exchequer approximately Rs 20,000 crore annually.

This was followed by a second round of cuts in December 2018, when the Council pruned rates for another 17 categories of goods and six types of services, leaving just one item of common use, namely cement, in the 28% bracket. The cuts were clearly unwarranted, and while consumers may have been appeased, they didn’t help revenue collections. The GST Council should not have gone for such steep cuts on so many items; even if it had decided to cut the rates, this should have been accompanied with a reduction in the number of slabs, which would have required some rates to go up.

Also, the several anomalies relating to inverted duties need to be addressed; this is becoming a problem for infrastructure projects where there is a mix of goods and services leaving large sums of input credit unutilised. The good news is that 20 states and UTs have reported an over 14% growth in collections in April. As such, states should not be unduly hurt by the lack of compensation for a shortfall in revenue growth of below 14%.

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