Next stage for GST

Rate rationalisation will be critical

The 47th meeting of the Goods and Services Tax (GST) Council, which ended on Wednesday, was perhaps one of the most important since the implementation of the new indirect tax regime. It not only marked the completion of five years of implementation, but also had a wide-ranging agenda. At this point, it is fair to argue that the system has not performed as expected. Revenue collection has underperformed, which added to overall fiscal stress, while the system has been grappling with structural issues, such as multiplicity of rates and difficulty in enforcing compliance. Although collection has improved over the past several months, the meeting in Chandigarh was expected to address some of these structural issues. In this context, the Council had constituted four groups of ministers to look into different issues.

The Council accepted the report submitted by the group of ministers (GoM) headed by Karnataka Chief Minister Basavaraj Bommai on exemptions and correction of the inverted duty structure. The group was also expected to make recommendations on rate rationalisation for which it has been given an extension. Rate rationalisation is important as the current overall rate is not revenue neutral compared to the taxes subsumed in the GST, which has been one of the biggest reasons for revenue underperformance. The group’s recommendations on exemptions and correction in duty structure have been accepted, which should help improve collection. The Council also accepted the recommendations of the GoM headed by Maharashtra Deputy Chief Minister Ajit Pawar on strengthening the GST system. The group, among other things, advocated better tracking of high-risk taxpayers. The GoM headed by Meghalaya Chief Minister Conrad Sangma, which looked into areas such as online gaming, casinos, and horse racing has been asked to reconsider the concerns raised by some states.

However, the biggest concern for some states was the end of the compensation regime. States were being compensated for the shortfall in GST collection, assuming a 14 per cent growth in revenue collection, which ends with the completion of five years. As Union Finance Minister Nirmala Sitharaman noted in the post-meeting press conference, several states argued in favour of extending the compensation payment, though for different time periods. No decision in this context was taken in the meeting. The government has already extended the collection of compensation cess, which will be used to repay the debt raised over the last two years to compensate the states.

Extending the compensation payment, to be sure, would be fairly complicated. Besides amending the law, the Council would have to decide the growth rate at which the states will be compensated. Clearly, the 14 per cent growth assumption was not practical. Further, a new mechanism will need to be devised by which the states can be compensated because the compensation cess collection will be used to repay the debt raised to compensate the states over the past two years. The imposition of additional cess could further complicate the tax structure. Therefore, extending the compensation regime would need extensive deliberations, and the issue should have been settled by now. If the compensation is not extended, which is a strong possibility, recommendations in the context of rate rationalisation would become more important. Moving to the revenue-neutral rate with fewer slabs would help boost revenue for both Centre and states.