Don’t put off rationalisation of GST rates

Baskar B 4727 | Updated on: Jun 27, 2022
The revamping of GST rates is a Herculean task for the government

The revamping of GST rates is a Herculean task for the government | Photo Credit: indiaphotos

The taxman and taxpayers are not at loggerheads 

The nation is on the cusp of celebrating the 5th anniversary of the Goods and Services Tax (GST) regime. The proposal to overhaul the regime to simplify its complex rate structure has been making headlines lately.

The GST Council has constituted a Group of Ministers (GoM) to consider matters related to rate rationalisation and provide a report on the way forward. The mandate vested with the GoM is useful in understanding the intention of the lawmakers. It is expected to follow a four-fold approach.

The GoM is expected to review the list of goods and services exempt from GST with the objective of expanding the tax base; review the instances of inverted duty structure and recommend suitable rates to minimise the issue; review the current rate slabs and recommend changes to garner the required resources; and review the current rate structure and recommend rationalisation measures.

It is evident from this directive that the government feels a need to revisit the current rate structure and implement a more efficient model that not only ensures higher revenue collections but also benefits industry/trade through free flow of input tax credit and reduced scenarios of inverted duty structure.

According to a World Bank study, India is only one of the five countries to adopt a four-tier rate structure.

While there is no doubt that the government would be undertaking a massive number crunching exercise to determine the most appropriate way forward, a few suggestions would be in order.

The classification issue

An issue that has plagued industry since the inception of GST pertains to classification of various goods and services. Due to the existence of differential rates, the taxman and taxpayers have been at loggerheads on the appropriateness of classifications adopted.

For instance, parts of motor vehicles attracted a common duty of 12.5 per cent under the erstwhile excise regime irrespective of whether the supplier classified the goods under Chapter 84/85 or 87. However, after transitioning into GST, if the parts are classified under Chapter 84/85, they generally attract a GST rate of 18 per cent and if they are classified under Chapter 87, they attract 28 per cent. With many assessees opting to continue with their extant classifications and with the new problem of a tax arbitrage, disputes are now aplenty.

If the intention of the government is to levy a premium rate on goods such as motor vehicle parts, rather than prescribing rates of 18 per cent and 28 per cent for different products, a single slab rate can be accorded for all such goods.

Such an exercise is required to be carried out immediately for scenarios where the final products (like automobiles) attract a higher rate of tax compared to the inputs used in their manufacture.

Such a reform would assist in not only mitigating unwarranted litigation, it may also help in securing higher revenues for the government. A similar exercise is warranted for various other goods and services as well. Further, essential goods such as ‘electricity’ is currently exempt from GST — that is, it falls under the 0 per cent tax slab. As a result, when electricity is supplied to industrial consumers, the credit chain is disrupted. All taxes suffered on procurements made in the course of generation of electricity become part of the cost of the final product.

While the present treatment of exempting electricity can continue for supplies made to non-industrial consumers, the government can tax electricity at an appropriate rate for supplies made to industrial consumers as that would ensure a free flow of credit and thereby, reduce the price of electricity and the ultimate products manufactured using electricity.

Credit flow

Such an exercise is necessary for various other essential products as well which are currently under the exempt category. This would not only expand the tax base, but also achieve the objective of ‘seamless flow of credit’.

Furthermore, several goods such as railways’ parts attract a lower rate of 5 per cent/12 per cent on their output, while their inputs attract much higher rates. This results in accumulation of input tax credit because of inverted duty structure.

Further, recourse to refund of such accumulated credit has been specifically barred in some of these cases. In such scenarios, either a higher rate of tax may be prescribed on the output supplies or the rates applicable on the input end can be lowered.

There is no doubt that the government has a herculean task of revamping the current tax slabs and determine the best approach forward while balancing between revenue collections, a seamless credit chain and specific industry issues.

As each industry is best placed to address its concerns, it is incumbent to make appropriate representations to the GST Council/Fitment Committee airing the same and suggest approaches to assist in informed decision-making.

Rahul is Director, and Sahana is Principal Associate, Lakshmikumaran & Sridharan Attorneys. Views expressed are personal

Published on June 27, 2022
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