Course correction mode: GST Council looks to fix duty structure, boost revenues

Course correction mode: GST Council looks to fix duty structure, boost revenues

India News


Taking note of the revenue trend dipping below the revenue neutral rate levels, the Goods and Services Tax (GST) Council will now be looking at a series of measures including rate rationalisations to correct the inverted duty structure and to take steps to augment revenues. The move comes after four years of the rollout of the indirect tax regime, with the acknowledgement that a series of rate cuts across these years and spanning over 500 items has resulted in a strain on finances of both central and state governments with lower-than-expected revenue buoyancy and an inverted duty structure for many items.

The Council will now be on a course correction mode as it seeks to correct the inverted duty structure for items such as footwear and textiles sectors beginning January 1. An inverted duty structure arises when the taxes on output or final product is lower than the taxes on inputs, creating an inverse accumulation of input tax credit which in most cases has to be refunded. Inverted duty structure has implied a stream of revenue outflow for the government prompting the government to relook the duty structure. For footwear, the government refunds around Rs 2,000 crore in a year.

The decision on inverted duty structure was deferred in June last year as the Council did not agree on the timing of the rate rationalisation to be done during the pandemic.

The GST rate on footwear worth up to Rs 1,000 was reduced to 5 per cent earlier, while those above this value attract a GST rate of 18 per cent. Inputs for footwear such as in-soles, heel cushions attract 18 per cent GST. Footwear is now likely to have a uniform rate of 12 per cent, irrespective of prices, sources said. Textiles, which currently are in the 5 per cent GST slab for fabrics and man made yarns are in the 18 per cent slab, is also likely to attract a 12 per cent tax rate with exceptions for some categories such as cotton products.

The anomalies in revenue stream arising out of earlier rounds of rate rationalisation were noted in the 45th GST Council meeting held in Lucknow on Friday. Union Finance Minister Nirmala Sitharaman after the meeting said that the revenue neutral rate has fallen to 11.6 per cent from 15.5 per cent.

“The Revenue Neutral Rate of 15.5 per cent coming down to 11.6 per cent is because of course, the Council in its wisdom probably over the years had reduced the rate of many many items and not just the reduction but the resultant refund due to the inversion have resulted, net net, in the collection coming down from the revenue neutral levels. As a result we feel that the overall collection has come down. We also feel why it has come down. But if we all put together we can all see that we are far below the revenue neutral rate,” she said.

Two GoMs will be formed to look at inverted duty structure and compliance measures through e-way bills, composition schemes.

“We are talking about rate rationalisation which is talking about inversion getting corrected. We have not mandated them to go into details of how many slabs. Not at all…their terms of reference will only relate to correcting inversion. So, rate being rationalised with that purpose,” she added.

A September 2019 report by the Reserve Bank of India (RBI) had noted that the rationalisation of rates by the GST Council has brought down the effective weighted average GST rate from 14.4 per cent at the time of inception to 11.6 per cent. It, however, said that enhanced buoyancy has been achieved by widening the tax base and removing distortions.

The GST Council had within one year of the July 2017 rollout of the GST reduced rates for every four items. The rate cuts on over 350 items out of total 1,211 items in the five broad categories of zero, 5 per cent, 12 per cent, 18 per cent and 28 per cent under GST were estimated to have resulted in a revenue loss of about Rs 70,000 crore in a year.

At the time of fitment of goods and services in the various GST slabs in May 2017, the government had said that about 7 per cent of the total 1,211 items were exempted, 14 per cent of the items were kept in the 5 per cent tax slab, 17 per cent of total items were in 12 per cent tax slab. About 43 per cent of items were in 18 per cent tax slab, while only 19 per cent of the items were placed in the 28 per cent tax slab. Now, only about 3 per cent of the total 1,211 items remain in the peak 28 per cent slab.

Revenue concerns have weighed on the discussions of the GST Council since 2019 and the revenue situation turned grim further after the Covid-19 pandemic. The gap in cess collections to meet the compensation to states, guaranteed at the rate of 14 per cent compounded rate from base year 2015-16 till June 2022, had to be then met through borrowings. Last year, the government had decided to borrow to meet the compensation cess deficit through back-to-back loans to states.

In FY 2020-21, an amount of Rs 1.10 lakh crore was released to states under the back-to-back loan arrangement. As per Centre’s estimates, Rs 63,000 crore is pending for FY21 to states after back-to-back loans and IGST settlement. For FY 2021-22, the gap between protected revenue and the actual revenue after release of compensation would be around Rs 1.59 lakh crore, out of which Rs 75,000 crore has been released as the first tranche to states.



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