In a haste

The digital GST rate is introduced way too early

Though the jury is divided on almost every aspect of demonetisation, not many can disagree with the fact that demonetisation did its bit to promote the Digital India campaign. The Government is back again with yet another missive to encourage non-cash transactions by using a tool that is entirely in its control — GST.

The Centre has proposed a 2-per cent discount in GST for consumers who make digital payments. The proposal is likely to be taken up in the next GST Council meeting in January — apparently it was scheduled for discussion at the Guwahati conclave of the GST Council but was not discussed due to paucity of time.

The incentive will be available to business-to-consumer (B2C) transactions for goods and services that face a GST rate of 3 per cent or more. The incentive will include a 1 per cent concession on the Central GST and another 1 per cent on the State GST. The move means that the effective GST rate for items in the 18 per cent slab will come down to 16 per cent for those paying through digital mode. However, the concession will be limited to ₹100 per transaction.

This implies that goods and services bought up to ₹5,000 per transaction will enjoy the full 2 percentage point concession of ₹100. The proposal will not apply to retailers registered under the composition scheme. Customers will be offered two prices, one with the normal GST and the other with two percentage points lower GST for digital payments. This would need some alteration in the tax computation process and the return filing templates.

Theoretically, the idea of imposing a Digital GST Rate is laudable. Yet, reasons for concern are plenty. The primary concern is that it is too early to offer such carrots under a tax law. GST is still a new law and revenue collections are oscillating substantially. Providing a 2 per cent rebate is going to further reduce collections from GST which could impact the coffers of the Centre and the States. It is not going to be too long before the State Governments ask for a compensation for their losses due to the digital GST Rate.

In turn, this would force the Government to tap into the Compensation Cess for monetary comfort. In short, the Government would be giving concessions to one set of customers only to take it back from another set. Even if the digital GST rate makes sense, it is too early to unleash it upon a nation when the law is still finding its feet. The cap of ₹100 per transaction is too less to induce taxpayers accustomed to cash to switch over to digital.

The condition not to extend the scheme to taxpayers registered under the composition scheme could actually turn out to be counter-productive — taxpayers with turnover of less than ₹1.5 crore are most likely to conduct some transactions in cash. They would argue that the equality concept (one of the canons of taxation law) is being violated since they are being discouraged from earning a tax incentive only because they are in a select category of taxpayers.

One of the weakest pieces of the GST law is the technical capability of the portal — incorporating a digital GST rate for every digital transaction is going to be a huge challenge.

That the GST Council reduced the rates of tax on numerous items at their latest meeting signals that there was no science in fixing the rates in the first place. There still remain some inconsistencies in the rates of tax — cement for example. The Council should engage in fixing the law in its entirety before adding more.

The writer is a chartered accountant

Published on November 29, 2017

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