The much-anticipated 55th GST Council meeting — will history repeat itself

Thus the reports quoting an unnamed Finance Ministry official mentioned that the GoM on rate rationalisation had recommended a hike  on ‘sin’ goods like aerated beverages, cigarettes, tobacco and related products to 35% from the present 28% with a separate cess also to be imposed. Further it was mentioned that the GoM had also recommended rates on apparel and footwear — rates of 5, 18 and 28 percent being suggested, depending on the cost of the product. The report also suggested  that  rate rationalisation is being  proposed on 148 items. Given these details there was adequate cause for  speculation.

The law as it stands provides for a maximum of 20% Central Goods & Services Tax (CGST ) and a corresponding rate under the State Goods & Services Tax (SGST). The maximum of 40% rate in effect gives the GST Council the flexibility to raise rates without having to approach Parliament. It was believed that this rate would help in the merger of the cess amount into the GST rate and allow for a smooth transition when the compensation cess came to an end. 

The recommendations will have to be seen in this backdrop. The terms of reference of the GoM which had been constituted for rate rationalisation included review of, exemptions, inverted duty structure, current slab rates and merger of slabs required for a simpler tax structure. GST currently has primarily four rates —  5%, 12%, 18% and 28% apart from a zero percent and  special rates for precious metals and gems.

The constant criticism of GST has been the multiplicity of rates and the need for a single uniform GST rate. In an ideal world this would indeed be possible-but as the current recommendation would indicate we do not live in an ideal world. Paradoxically there is a dire possibility of a fifth slab with cess thrown in for added measure.

It is a moot point if an increase in a GST slab will result in increase in revenue. Cigarettes for instance  is among the highest taxed commodity — it has a basic excise duty, national calamity contingent duty, a GST of 28%, and a compensation cess which has both an ad valorem element  and a specific element, both depending on the length of the cigarettes. Undoubtedly taxation of cigarettes is not just a revenue measure but also aims to address social and health concerns.

But as the latest smuggling report of the Directorate of Revenue Intelligence  (DRI) shows the high rate of taxes also creates an arbitrage and huge incentive to smuggle and evade taxes. The revenue that is lost and the consequential damage which proceeds of evasion cause is arguably much more. It is a classic example of what Prof. Karthik Muralidharan terms as the quality of revenue, being poor — that is the marginal cost of public funds (refers to the total social cost of raising an additional rupee of tax revenue) being higher than the revenue raised.

The recommendation to have discriminatory tax slabs — a rate depending on the price slab, will cause pressure on the administrative and enforcement machinery. It will encourage evasion and a practice of pricing the product just below the threshold. There is no news about the outcome of the GoM tasked to submit a proposal  by December 31,  2024, ‘to replace the compensation cess after its abolition’. It is not clear whether the rate rationalisation recommendations are seeking to address this issue also. GST revenue has been doing well and the industry and administration have settled down — the present recommendations will disrupt the smooth routine.

The GST council should address the long discussed but never acted issue of expanding the tax base by including at least some petroleum products (ATF, Natural Gas) in the GST fold. Tax administrations both in the centre and the States will need to focus on reducing litigation and ensuring reducing arrears. Evasion continues unabated — data analytics and targeted audit and enforcement measures can have a huge multiplier effect in nudging potential evaders to fall in line. 

The GST council will have lot to deliberate upon when they meet in Jaisalmer today. We can expect a whole host of decisions-exemptions, new rates and clarifications. Both Industry and the Administration will have to brace to implement these far reaching recommendations. Historically Jaisalmer’s location along the camel caravan trade routes made it a staging post and a place to impose taxes on trade. We will have to wait and see if history will repeat itself.

— The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.

Read his previous articles here