GST revenues continue to impress every month — the ₹1.42 trillion reported in March 2022 is expected to be reached regularly in the coming months. These robust numbers can be attributed to a combination of factors — an uptick in economic activity, greater compliance from taxpayers and a number restrictions on availing input tax credit.

However, State governments have never really got their pound of flesh as was promised when GST was introduced. This has forced them to give their assent to a proposal suggested by a Group of Ministers — tinkering with GST rates to increase revenue.

Rate changes

The Group of Ministers are finalising their recommendations which are likely to be presented at the Council’s meeting scheduled in May. It is widely expected that the Council will consider doing away with the 5 per cent slab and move some goods of mass consumption to the 3 per cent slab and the remaining to a new 8 per cent slab. The Council will also consider bringing some items from the exempt list into the tax net. A back-of-the-envelope calculation shows that a 1 percentage point increase in the 5 per cent slab can bring in additional revenues of ₹50,000 crore annually.

There is a school of thought that says there is no need to tinker with GST rates which seem to have found their right balance now. Specific items like gold jewellery in the 3 per cent slab, essentials at 8 per cent, other goods at 12 per cent, some goods and most services at 18 per cent and “ sin” goods at 28 per cent are rates that taxpayers have got used to. Save for a few specific items that are still in the 28 per cent bracket, there are not too many complaints about the GST rates.

It is clear that the 8 per cent rate has been thought of only because 10 per cent would be considered too high for the items in the 5 per cent bracket and any other higher percentage would not contribute much to revenue augmentation. The proposed hike gives rise to a number of questions. Would the 5 per cent slab be retained for some items or would it be removed completely?

What would be the basis on which items would be shifted to the 3 per cent and 8 per cent slab? Would it not be better to morph both the 12 per cent and 18 per cent rates into a 16 per cent slab? The most important question would be whether input tax credit would be available for the items that are in the 8 per cent slab.

Retaining the 5 per cent slab would only increase the number of rates — something that should be avoided. The Group of Ministers would do well to do an analysis of the impact that morphing the 12 per cent and 18 per cent rate into 16 per cent would have. There is a general feeling that revenues would drop since almost all services are in the 18 per cent bracket. Yet, this is an exercise worth doing because the restrictions on input tax credit would offset the decrease in revenues.

Taxpayers would be hoping that the benefit of input tax credit is given to items falling in the 8 per cent slab. Denial of ITC would force an increase in prices that would add to the elevated levels of inflation being witnessed now.

Due to the menace of fake invoices, GST laws have regularly imposed artificial restrictions on availing input tax credit. These have taken the form of a monetary limit on the amount of credit that can be availed, mandating that not all the input tax credit can be used for certain category of taxpayers and requiring credit to be taken only when the invoice is appearing in GSTR 2A.

Since the focus of the GST Council is on revenues, they could do an impact assessment to analyse the impact on revenues if the artificial restrictions on input tax credit are removed and are replaced by a small negative list of goods and services on which credit cannot be taken. It is widely felt that this would bring in more revenues than an ad-hoc increase in rates.

The writer is a chartered accountant

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