As it may not find it easy to raise the tax rates on mass-consumption, high-revenue items, given the overall demand slump, the Goods and Services Tax (GST) Council will likely increase the existing cess on so-called luxury/demerit goods and also impose such levies on a clutch of other items. The idea is to ensure that the steps taken to boost GST revenue don’t hit consumption and ruffle too many feathers in political circles.
Further, the Council may also correct the inverted duty structure (where the tax on input is higher than on the final product) on a host of items. This is expected to address the issue of certain sections of taxpayers claiming input tax credits more than the actual tax content in their inputs in some cases, even claiming refunds without any actual output tax outgo in cash. The Centre has delayed payment of the compensation amounts to states for the August-September period, which was due in October.
The payment for October-November would be due by December 10. Though states argue there are sufficient funds currently in the compensation cess fund, it isn’t clear why the central government is holding on to the funds. “Increasing the cess on automobiles has limited utility given that vehicle sales are down,” Bihar deputy chief minister Sushil Modi told FE. The cess route is “the only feasible option” to ensure that the states continue to enjoy the protected SGST revenue growth of 14% annually, he added.
Modi added that it was difficult to see the Council agreeing on increasing the tax rate on items that attract nil tax now (there are 156 such items). These items include unpackaged grains and other items of mass consumption. He also said increasing the cess on tobacco and aerated drinks could be the most viable option. Given the yawning GST revenue shortfall and the shrinking compensation kitty, the 38th GST Council session to be held here on December 18 is slated to discuss several options to boost revenue. According to a recent letter from the Council to state, the options include reviewing the current list of exempt items, as well as the current GST and cess rates.
The GST collections saw a contraction in September and October. Though the revenue grew 6% in November 2019 (concerning mostly October transactions), to report the third-largest monthly mop-up of Rs 1.03 lakh crore since the tax’s launch in July 2017, this is largely attributed to the Diwali season and is likely to be unsustainable. The Council, according to sources, could look at imposing cess on items in the 18% tax bracket if there is a consensus that these items can be classified as non-essential, an official said. This makes sense as nearly half of GST revenue comes from items in the 18% slab. The cess is now there on a handful of items that aren’t in the 28% tax slab while all items in the 28% slab attract cess.
Sushil Modi said a 14% assured revenue growth for states was high at a time when nominal GDP growth has slowed (the growth was at a multi-year low of 6.1% in Q2). “In the few years preceding GST, most states’ tax revenues were growing at an average rate of 10-11%,” he said.
Under the GST Act, the states are guaranteed a 14% revenue growth year-on-year which works out to be Rs 55,800 crore per month of state GST collection this fiscal. However, in the April-November period, the average monthly collection was short by over Rs 8,500 crore. While the compensation cess requirement for this period is nearly Rs 69,000 crore, the cess fund has held Rs 64,500 crore, a deficit which is likely to get worse over the rest of the fiscal.
While the Centre had disbursed over Rs 47,000 crore in compensation to states for the April-July period, the bimonthly payment for August and September, which traditionally happens in the subsequent month, has been delayed. Though states acknowledge that the guaranteed growth is steep especially when the economy is facing consumption slump, they didn’t buy into the suggestion made by the Finance Commission to pare it down.