In addition, the Council rejected a proposal to bring aviation turbine fuel (ATF) under the GST framework, despite repeated requests from the aviation ministry and industry stakeholders.
The Council also deferred a decision on reducing GST rates on insurance premiums. Finance Minister Nirmala Sitharaman stated that the Group of Ministers (GoM) would revisit the matter after receiving feedback from the insurance regulator. This issue has remained a prominent item on the GST Council’s agenda for over a year.
To analyse the meeting’s outcomes, CNBC-TV18 interviewed Vivek Johri and Najib Shah, both former chairmen of the Central Board of Indirect Taxes and Customs (CBIC).
Edited Excerpt from the Discussion:
Q: A perception that is there after this meeting is that some of the things have been made unnecessarily complicated. How would you address those concerns from the industry, from the laymen and experts?
Johri: By and large, the Council has stayed the course on trying to resolve contentious issues and disputes. And these are issues where there have been disputes in the past, either because of investigations or audits or whatever, and there was a lack of clarity, and the council has chosen to clarify these issues and, in some cases, even decided that if there’s a higher rate of tax being imposed, then that should happen prospectively not retrospectively. But yes, one or two issues — the one development which has unsettled businesses, conceptually, in the sense of whether we are heading in the direction of simplifying the GST structure is, of course, the case of popcorn. But I think in all fairness, what the council has done is to clarify the classification of these products, and they have then said that since it is classifiable under such and such HS code, which is what is used for the classification of products and the GST, then it will attract this rate. So, the decision on the rate is kind of consequential, and I presume that as and when the group of ministers goes into the rationalisation issue, they will take a call and try broad-band products which are similar under the same rate of tax. So, I think the clarification was only about the classification part. And the divergence of rates that it has given rise to is consequential. But by and large, if you look at issues like gift vouchers, penal charges levied by banks, you know, packaged commodities, their definition, payment aggregators, there’ve been a lot of issues which the council has clarified.
Q: The GoM report on rate rationalisation, which is supposed to be submitted, has now been deferred till the next meeting of the GST Council. What do you think is the major issue here? There has been a need and call from the industry to rationalise the tax slabs, reduce them to three. What is the major issue here and the difficulties that you’ve seen over the past few years?
Johri: I think the major difficulty is in trying to balance the revenue outcome. Currently, you have four major rates — 5%, 12%, 18%, and 28% — and, of course, some other rates which apply to a very small set of items, goods or services. If you have to compress the number of rates, then 12% has to go up, but 18% may need to come down because, if you recall, the revenue-neutral rate that was worked out by experts prior to the launch of GST was close to around 15%. So if that unification happens, the drop of 18% to some middle level is going to cause a loss of revenue. So the question is, how do you make up that loss of revenue? So I think that is one of the difficult parts of the exercise. The other part, of course, is to broad-band goods and services of a similar nature so that they attract the same rate of tax, and disputes are minimised. So I think these are the two broad parameters where the Group of Ministers has to do a balancing act. And it’s a complex exercise, because there’s a large number of goods and services that are going to be impacted by this.
Then, the third, of course, is a correction of inversions. These inversions are obtained in the textile sector, the fertiliser sector, and one or two others. These are also difficult to correct unless they are compressed into fewer rates.
Q: Do you think it would be possible to arrive at any decision on rate rationalisation by the next meeting of the council? Or do you think this is something that may take more time?
Johri: I think it will take more time. At the next meeting, what I expect is just the presentation of the report. Then, there would be a discussion, and I think it would require more time. I would be very surprised if the Council is able to sort it out within one meeting.
Q: The other important issue that the industry was hoping for an outcome on was GST reduction and exemption with regard to life insurance and health insurance. This issue, according to certain deputy CMs, needed more time. In fact, the Bihar deputy chief minister was quoted by the FM as saying that he was one of those who had said that this needs more consultation, maybe another meeting. Now the IRDAI’s inputs have also been sought. Do you feel that this was an area where consensus could have possibly been built up?
Johri: The problem is most likely about the implication of giving a full exemption to these insurance products. The fallout of that is going to be that the input tax credit chain would obviously get disrupted if some of the products that insurance companies are offering are exempted from tax. So, I think before a final decision is taken, and if the intention is to pass on the benefit of this reduction entirely to the consumer, then the council would have to take into account the implication of a full exemption on the input tax credit that insurance companies would otherwise have been able to neutralise. Otherwise it would be a cost to them, the disruption in the input tax credit chain, which they would either have to absorb or pass on to the consumer. And if they choose to pass it on to the consumer, then the purpose of giving a full exemption may not be fully served. So I think this is one of the issues because of which this may require some time.
Q: As far as insurance is concerned, we had experts on our programme after the meeting on Saturday, and they all felt that this is a necessity when it comes to insurance, life insurance and health insurance. These reductions should have been considered and decided upon. All the inputs are already there on the table. So, what do you feel about what the GoM has already said against what the industry wants and the reasons for the delay?
Shah: Obviously, all the inputs were not available, which is the reason why the decision was deferred. I believe it’ll take time. Every exemption would mean a break in the chain. It would mean costs, and somebody has to bear them. So obviously, there’s a lack of communication between what the industry thinks and what the government of India and the GoM felt in the matter.
Q: How do you think one can go about making a decision and a balancing act between what the industry wants and what different state governments’ views are on GST, insurance policies, life insurance, term insurance, and health insurance?
Shah: There is consensus that this ought to be given. The modalities are being worked out. You have a GoM headed by the deputy chief minister of Bihar, so I guess, again, by the next meeting, I think this can be sorted out. I am not aware of what IRDAI has to say in the matter because they are a critical player in the whole scheme of things. And again, there’ll be some costs which somebody has to absorb. And that’s the reason why it has been deferred. So hopefully, by the next meeting, we’ll have a decision in this matter.
Q: As far as the GST on electric vehicles, on used cars, was concerned, this is only when a dealer or someone is selling an old car or an old two-wheeler, for that matter, and the GST will be only on the margin, that’s the difference between the purchase price and the selling price of an old vehicle. Given the fact that we are trying to increase electric vehicle penetration in the country, do you feel that this category should have continued to be exempted from this 18% tax rate?
Shah: It’s irrelevant what we feel in the matter. Quite frankly, that’s a decision which perhaps could have been taken. But having said that, it has been clearly brought out that it will be on the margin. Let us wait to see the notification itself and the final wording in the notification when it does come.
Q: Do you also feel that somewhere, a clarification would be needed on how this higher rate of taxation on used cars, especially small cars, including EVs, will come into effect? Of course, they have said that if one individual sells it to another, the tax does not come into effect. But in what cases will the tax come into effect? Will it only be on companies such as CarDekho or Mahindra First Choice, which are used car sellers?
Johri: That is definitely one category which will bear the tax. The other category would be corporates who have already registered under GST and who choose to sell out of their stock of used cars.
But, I would like to point out two things. One, if you recall, in her briefing, the FM was quite clear that the Centre was keen that the rate be dropped to 5% for the sale of second-hand EVs. But the thing to keep in mind also is that since it is only on the margin of the reseller, the effective rate of tax is actually going to be lower than 18%. So rather than charging 18% on the full value of a second-hand car when it’s sold, the tax is going to apply only to the margin of the reseller. And to that extent, there is an in-built abatement in the provision. But I think we’ll have to wait for the notification to see what the fine details are.
Watch the accompanying video for the entire discussion.
