GST Council may put off plan to merge slabs amid high oil prices

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The ministers, who are part of the GST Council, said that the merger of the rates may be put on the back-burner, considering its implication on inflation. They added the GST Council would evaluate the situation and decide on the timing of the reform. The group of ministers (GoM) tasked with the rate rationalization exercise has met twice so far and has not made much progress with its recommendations.

West Bengal minister of state for finance Chandrima Bhattacharya, who is part of the GoM, said that the panel was expected to meet on 27 November, but the meeting was deferred. “We have not made much progress with respect to making recommendations. The new dates for the GoM meeting are yet to be communicated,” Bhattacharya said.

The GST Council had tasked the GoM led by Karnataka chief minister Basavaraj S. Bommai to look into the rationalization of tax rates and consider the merger of different tax slabs with the objective of boosting revenue collections after June 2022, when states will stop getting compensation for revenue losses from the Centre. The other members of the GoM include Bihar deputy chief minister Tarkishore Prasad, Kerala finance minister K.N. Balagopal and the finance ministers of Uttar Pradesh and Goa.

“The GoM could not meet as UP and Goa ministers weren’t available as these states went to polls. Now that the governments are getting formed in these states, the panel could meet soon,” a finance ministry official said, requesting anonymity.

The delay will mean that the next meeting of the GST Council, likely in the second half of April, may not consider the committee’s recommendations on rate restructuring while pursuing the easing of compliance for taxpayers. Besides, several states are not in favour of a merger that would raise GST rates for products and services.

According to a central government official privy to discussions on the rate merger, the GoM, in its November meeting, decided to phase out exemptions for items other than agriculture and those consumed by the poor. However, the GoM and the government has received several representations from stakeholders and industry against any upward revision in rates as it would impact the economic recovery and result in further price hikes, especially in items used by health and food sectors because GST rates on some items will move up from the 12% rate at present.

Queries sent to a spokesperson of finance ministry on Tuesday morning remained unanswered till press time.

The problem of an inverted duty structure arises when the finished product is at a lower tax bracket compared to the raw materials. However, this usually leads to a rise in the GST rate of the finished product. Mobile phones saw such a duty correction in March 2020.

Delhi deputy chief minister and finance minister Manish Sisodia said the state is not in favour of any merger of rates but would prefer rate-cuts at this juncture that would only improve compliance. “Delhi supports lower GST rates and higher compliance. This is because higher tax rates encourage evasion. Raising the rates never gives a solution. AI (artificial intelligence) based enforcement and lower rates will only improve compliance and raise tax collections. In the case of merging two GST rates, taxes may have to be increased for certain goods and services and lowered for a few. This is not a fair system. Why merge the rates? Why not bring down the prevailing rates itself,” said Sisodia.

The GoM and the fitment panel are looking at items with inverted duty structures such as renewable energy devices, railway parts, pharmaceuticals, tractors, LEDs, agarbatti, ink, pen, utensils, and water pumps. The items in the 12% slab include butter, cheese and jams. The rates for these items would go up in case of a merger of the 12% and 18% slab, bringing both around a 15% tax rate. However, items in the 18% slab, which includes biscuits, mobile phones, cakes and pastries, would see a reduction in rates. Most services are covered under the 18% GST slab.

There are four main GST slabs—5%, 12%, 18%, and 28%. Besides, there are special rates of 0%, 0.25%, 1%, and 3%. In addition, some demerit items, including aerated drinks, attract a cess ranging between 1% and 25%. As for rationalization of rates, key suggestions compiled by the fitment panel in 2019 included hiking the rate on precious metals from 3% to 5%, taxing higher segments of education and health, and revisiting rates on certain items that went down from 28% to 18%.

Chhattisgarh health minister T.S. Singh Deo, who represents the state in the GST Council, said the slab rationalization was important to simplify the very complicated GST structure.

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