GST rationalisation: Challenge and response

Synopsis: A revision of GST slab rates may create some disquiet, but, if cleverly crafted, it could be a game-changer for manufacturing.


Recently, the group of ministers (GoM) was formed by the GST Council for rate rationalisation and correcting the inverted duty structure.

The GoM has a very difficult task of balancing a number of objectives. The most important being to raise the average incidence of duties from the current level of 11.8% to about 14% (revenue neutral rate) as suggested by the Fifteenth Finance Commission.

The other objective of course is to make the whole process non-inflationary while also giving a boost to labour-intensive manufacturing.

The entire GST rate rationalisation exercise must not look at it purely from the narrow prism of revenue but also keep an eye on the larger macro economy.

What are the suggestions/solution given by the author to achieve the above objectives?

Firstly, to keep the whole process non-inflationary, the standard GST rate must be brought down from 18 per cent to 16 per cent. This will especially benefit the services sector, which now bears the primary responsibility of creating employment.

However, to do this, the rates at the extremities of the GST rate spectrum have to go up. For example, there is a strong case for phasing out a lot of exemptions, which is in line with the recommendation of the Committee on Dual Control, Threshold and Exemptions.

Secondly, the import regime has also to be changed as it has become too protective in the last few years. The average import tariff rates have gone up from 10 per cent to 18 per cent. This is hurting industry. Exports growth requires cheap imports of critical raw materials.

A recent study by Arvind Subramanian and Shoumitro Chatterjee showed that the import content in the total value added in the textile sector was 40 per cent for China, 46.1 per cent for Vietnam and 16.4 per cent for India.

Thirdly, the other extremity of the GST rate spectrum, the peak rate of 28 per cent-plus cesses must move to 30 per cent-plus cesses. To cushion the impact of this increase, two-wheelers could be brought under the 16 per cent rate slab.

Fourthly, two sectors will have to be tapped in order to raise the revenue weighted average GST incidence. This would require revisiting of GST rate on gold, which is now at the special rate of 3 per cent. With 80 per cent of gold purchases and ownership being concentrated within the top income decile of the population, there is a case to raise this rate to 5 per cent. This could be justified if the merit rate moves to 8 per cent.

In the case of tobacco, the present GST rate is 5 per cent for unprocessed tobacco levied under the GST reverse charge mechanism. This GST rate could move towards the general tobacco rate of 28 per cent, as there is at present a lot of mis-declaration of processed tobacco as unprocessed. Further, this measure would also garner more revenues for the government to the extent unprocessed tobacco finds direct use in the exempted downstream tobacco products.

Fifthly, the inclusion of petroleum was debated in the recent GST Council meeting. However, this is not the appropriate time to bring petroleum under the GST net. The measure could probably be considered when international oil prices soften in the future. As a start, we could bring aviation turbine fuel (ATF) and natural gas into the GST net. With the aviation industry facing a difficult time, bringing in ATF under GST will help.

Finally, there are two other segments which need to be brought under GST, electricity and real estate. But their inclusion will require a serious dialogue with the states because a substantial amount of their revenues is involved.

Source: This post is based on the article” GST rationalisation: Challenge and response” published in Business Standard on 14th October 2021.

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