No surprises

The 45th GST Council meeting on Friday proceeded along expected lines. It was obvious at the outset that the inclusion of petrol and diesel in the GST framework and the extension of compensation cess payouts to the States beyond July 2022 were not going to happen. As Finance Minister Nirmala Sitharaman indicated, the issue of fuel being included in GST came up for discussion only at the behest of a recent Kerala High Court ruling. She observed, and not without basis, that the time was not right. The inclusion of petrol and diesel under GST would entail the loss of an option for States to raise revenues in straitened times. The issue of including fuel is also bound up with the compensation cess question. The GST law mandates that States be compensated to the extent of their shortfall vis-a-vis an annual revenue increase of 14 per cent in the wake of the shift to GST, for five years ending June 2022. With the onset of Covid, State revenues declined while collections including the cess corpus dwindled – as a result the GST Council decided to fork out the swelling compensation amount with the Centre borrowing from the market on the States’ behalf and paying them. This sum is estimated to work out to ₹2.69 lakh crore by the end of this fiscal. The Centre has done well to continue this cess till March 2026 on a clutch of ‘sin’ goods to raise this amount. Compensation cess payments to States can be reconsidered if the post-pandemic recovery hits a roadblock. In this situation of revenue shortfall, a shift to GST on fuel is simply off the table.

As for the ways of the fitment panel, it has done well to bring services — such as e-commerce transport and food delivery services, OTT platforms and ice-cream parlours — that were hitherto operating below the radar into the GST fold. But the overall focus smacks of adhocism. The increase in rates of ores, renewable energy components, paper packaging and railway parts is baffling. In view of the inverted duty problem in many goods sectors that use services inputs (all rated at 18 per cent), there should have been some deliberations on aligning the two. In this respect, some essential services could be shifted to the 12 per cent bracket. GST rates need to be rationalised anyway — more so in a scenario where services account for a rising share of costs on account of digitisation, rentals and transport.

The Group of Ministers set up to look into inverted duty structure should sort out the matter soon, in view of problems of working capital blockage and interest costs as a result of unutilised input credit. Rule 89 (5) of the GST law, which rules out refunds of unutilised services inputs in an inverted duty situation (restricting this to goods input), should be re-examined. The apex court has said in the VKC Footwear case that it is for the lawmakers to address this problem, as the law was amended in 2018 to exclude services inputs. GST cannot be allowed to fall victim to tax and legal wrangles, raising costs along the value chain.

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