It may not be politically palatable, but officials are pushing for quickly reworking GST slabs, along with a rise in levies, while correcting the inverted duty structure on garments, footwear and fertilisers to ensure that states and the Centre earn more revenue amid signs of higher economic activity. On Friday, several state finance ministers had blocked a move to increase GST on garments and footwear as part of the proposal to correct the inverted duty structure where the finished product has lower levies than inputs on the grounds that this was “not the right time” when businesses are demanding a stimulus.
At the same time, they are insisting that the Centre ensure that not just their revenue but even growth in collections is protected through compensation, for which they are pushing the GST council to borrow from the market. Officials at the Centre and states, and even some state FMs, are skeptical. First, the RBI needs to agree to the move and then the modalities have to be worked out who will guarantee it, how will it impact the fiscal deficit of the Centre and states, and the repayment mechanism and schedule. Instead, officials at the Centre suggested that the current crisis gave the council an opportunity to go for the long-pending “rationalisation” of levies. “If you earn higher revenue, the need for compensation comes down. The other option is to raise the compensation cess or bring more items in its ambit,” a senior officer said.
The proposal, which was flagged during a GST council meeting last winter, entailed raising the rates across slabs, although it was then argued that the burden on the consumer will not be proportionate, given that the credit for tax on inputs will partly blunt the impact. Officials had suggested raising the levy on the 5% slab to 7-8% and even doing away with the 12% slab to move over 200 items in the 18% bracket, which could have generated additional revenue of Rs 1 lakh crore. States had sent the issue back, arguing that it required a deeper study, with the GST council secretariat asked to come back with a detailed analysis. “The issue needs to be explained. After all, states and the Centre did increase VAT on fuel and consumers are paying for it. Similarly, a 1-2 percentage point increase will not pinch them,” said an officer.
So far, even the proposal to correct the inverted duty structure had not found favour. At Friday’s meeting, the GST council secretariat sought to push for discussion on the inverted duty structure for fertilisers, footwear, fabrics, renewable energy devices, tractors and pharma products, only to be spurned by the states.