The Goods and Services Tax (GST) Council is likely to consider a ministerial group’s report on introducing a differentiated regime for sectors where tax evasion is very high, such as brick kilns, sand mining, and gutkha and pan masala production, even as tax experts have urged caution about such carve-outs.
The Council, which will meet physically, for the first time since the pandemic’s onset, on September 17 in Lucknow had earlier constituted a Group of Ministers (GoM) to consider demands of some States, including Uttar Pradesh, to tax these products based on production capacity rather than output and introduce Special Composition schemes.
Tax evasion is very high in these sectors — for instance, ₹830 crore of tax evasion was detected at a single pan masala unit earlier this year. The seven-member GoM, convened by Odisha Finance Minister Niranjan Pujari, is tasked with examining the feasibility of moving to a capacity-based tax regime and other alternatives to plug tax leakages.
The impact of a capacity-based levy for these sectors on the overall destination nature of the current GST design is a matter of concern. Atul Gupta, senior director at Deloitte India, warned that such a shift would be detrimental to the fundamental idea of GST and send out the wrong signal to honest taxpayers.
“The biggest risk of extending a capacity-based or composition scheme to such sectors is two-fold — it goes against the very edifice of GST as one of the objectives was to ensure buoyancy in revenues with increase in sales volumes,” he said, adding that it could open the floodgates for such demands from other sectors, such as textiles.
“It will not be easy to implement capacity-based taxation system and it may not even yield the desired result of curbing evasion, the main reason for which is extremely high tax rates,” said Rajat Bose, partner at Shardul Amarchand Mangaldas & Co.
Abhishek Jain, tax Partner at EY, also stressed that the flip side of trying to plug revenue leakage in these sectors with such measures is the added complexity it would introduce in the GST structure.
“There are many aspects of the law which are so inter-linked that change in one aspect may have ramifications elsewhere,” said Mr. Bose, stressing that issues such as point of taxation, place of supply and eligibility to claim input credit, need to be worked out first.
“A composition or capacity-based levy gives the wrong signal to an honest taxpayer by conceding that the Revenue authorities are not competent to check evasion and in fact, puts a premium on tax evasion,” the Deloitte India senior director said. Moreover, this could induce further evasion as inputs of such products may not be tax creditable against the final products’ tax burden on the basis of production capacity.
Mr. Gupta suggested the government check GST evasion using better data analytics and introducing innovative, stringent legal provisions to deter tax avoidance. Past composition schemes have not been effective in checking evasion, neither have capacity-based systems, with the latter leading to rampant litigation over production capacity disputes between Revenue authorities and producers, he pointed out.