Structural changes in GST

Synopsis: Several important decisions taken during the Goods and Services Tax (GST) Council’s 45th meeting in Lucknow last week.

What are the important decisions taken during the GST Council’s 45th meeting?

Concessional rates for Essential medicines: The council extended concessional rates for several drugs, such as Remdesivir, used to treat Covid-19. It also reduced duty on some other drugs like Itolizumab and Posaconazole till December.

Reforms in Inverted Duty structure: It further decided to correct the inverted duty structure in textile and footwear, which was discussed in earlier meetings. Additionally, the council decided to form two groups of ministers to examine the issue of inverted duty structure in different sectors and using technology to improve compliance.

Tax collection responsibility shifted to E-commerce entities instead of restaurants: E-commerce operators like Swiggy, Zomato have been asked to pay GST on restaurant services supplied by them, at the point of delivery. 5 per cent GST will be levied at the point where the delivery is made by Swiggy and Zomato. The tax will also be imposed on cloud kitchens.

What decisions was taken w.r.t extending GST compensation for states?

At the time of implementation of GST, it was decided that states would be compensated for shortfall in revenue collection with an annual growth rate of 14 per cent for five years.

Some states have argued in favour of an extension of GST compensation beyond 5 years. In this regard, the minister said the compensation to states would not be extended beyond June 2022.

Why the compensation won’t be extended beyond 2022?

Extending the compensation mechanism beyond June 2022 will further complicate the GST system since compensation cess collection will be used to repay debt.

Any extension in the collection of the compensation cess itself will affect items on which it is levied and firms will have to alter business plans.

The basic structural problem is lower revenue collection, and government want to rectify this anomaly.

What is the reason for low revenue collection?

Premature rate reduction, largely because of political reasons, has resulted in lower revenue collection.

For instance, MS Sitharaman noted the revenue-neutral position at the time of implementation was about 15 per cent. However, the rate has come down to 11.6 per cent.

The Fifteenth Finance Commission report also showed, revenue from GST was lower by well over 1 per cent of gross domestic product in 2019-20, compared to the collection from taxes subsumed into GST in 2016-17.

What are the impacts of low revenue collection?

Lower collection affects the central government finances and has an additional indirect impact on states in terms of lower transfers.

Lower overall GST collection is one of the reasons why dependence on petroleum products for revenue has increased

Why tax collection responsibility was shifted to E-commerce?

Tax evasion: As per estimates, the gap in taxable turnover for suppliers where TCS was deducted by Zomato was greater than the turnover declared by such suppliers. tax loss to exchequer due to alleged underreporting by food delivery aggregators is Rs 2,000 over the past two years.

What should be done?

Firstly, the council should target reverting to the revenue-neutral rate as soon as possible, along with reducing the number of slabs.

Secondly, Tax input credits to restaurants are not available. This is because, since raw ingredients are mostly sourced from the informal sector, they have few supply invoices to claim any tax already paid by suppliers. But, For GST coherence and definitional clarity, input credits should invariably be allowed.

Source: This post is based on the article “Structural changes in GST” and “The food tax that points to a loss of clarity on GST” published in Business Standard and Live Mint on 20th September 2021.