Why do GST rules need to be tweaked?

What is the problem?

Revenue Secretary Hasmukh Adhia recently said the Goods and Services Tax rate structure needed to be tweaked, prompting the question why this is the case, and if it were to be revised, what would those changes involve. Ever since Prime Minister Narendra Modi said on October 4 that GST procedures would be reviewed and bottlenecks removed, the GST Council has taken decisions and its officials have made comments that underscore the aim of this revision. At the last GST Council meeting on October 6, a slew of decisions was announced, from rate reductions to the easing of compliance norms.

The way the GST is structured now, there are seven rates — 0%, 0.25%, 3%, 5%, 12%, 18%, and 28% — applicable to various goods, not counting the various cesses levied over and above the highest rate of 28%. This is a far more complex rate structure than that applied in the 160-odd countries that have implemented a unified tax structure like the GST. Most of these countries have two rates of tax, while some even have one.

This multiplicity of rates has created a huge compliance burden on companies, since the classification system is not always easy to understand. For example, soon after the launch of GST, the government had to clarify that chocolate-covered barfis would be taxed at 5%, the same rate as normal barfis. The confusion arose because the GST Council had said anything that used cocoa as an input would be taxed at 28%.

The Revenue Secretary also suggested that, going forward, the GST Council would look into pruning the number of items in the 28% slab. Finance Minister Arun Jaitley, at a recent press conference, confirmed that Mr. Adhia’s comments were in line with the government’s stated objectives.

Are there many rates?

The revision of rates matters for several reasons. The whole point of implementing such a ‘Good and Simple Tax,’ as Mr. Modi dubbed it, was to reduce the compliance burden on companies and improve the ease of doing business. The multiplicity of rates is hindering this, since companies are having to spend more on preparing themselves for the inevitable litigation, not to mention hiring of tax consultants to oversee the monthly filings of detailed returns.

Being an indirect tax, the GST affects each and every person during almost every transaction they conduct over the course of their normal day — whether it is at a restaurant, barber, cigarette shop or movie theatre. A revision of rates would thus affect the common man directly. In this context, the people of Gujarat — the Prime Minister’s home State, which is going to the polls soon — are particularly sensitive to the GST rollout. In line with that, the Gujarat government has announced that all GST payments on drip irrigation equipment would be borne by it. Another important aspect to keep in mind while discussing the revision of GST rates is the other party involved in taxation — the government. The government’s argument for the number of rates in GST is that the higher 28% ‘luxury and sin’ rate offsets the loss of revenue due to most items of common use being placed in the 5% or exempt categories. The government needs to maintain its tax collections, so any rate revision needs to be informed by that imperative.

What is the road map?

Mr. Jaitley has also spoken about the possibility of collapsing the 12% and 18% rates into a single slab once the implementation of the indirect tax regime settles down. So, eventually, we could see a GST rate structure with at least one fewer rate.

Another problem that may be addressed, according to Mr. Adhia’s statement, is the categories of items themselves. He said: “There is a need for harmonisation of items chapter wise,” which means similar items now in different tax slabs — like chocolate syrup and sugar syrup, for example — could be brought under a single rate. At its next meeting on November 10, the GST Council could revise the rates on more items and even include real estate in the ambit of GST. With the Gujarat election schedule announced, it is not clear how much more relief the Centre can give traders from the State on the GST till the results are announced on December 18. For now, the Prime Minister has asked traders wary of joining the GST net not to worry about their past operations being under the scanner — taxmen will not be allowed to scrutinise their past records.


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