Converging GST rates: Now’s not the time

There are uncertainties currently, both economic and political. And convergence needs an informed debate first

Multiplicity of tax rates — 0%, 0.25% for semi-precious stones/diamonds, 3% for gold/silver, and 5%, 12%, 18% and 28% for a range of other goods and services — has dogged GST since its inception. Political reality dictated the need for so many rates.

Revenue neutrality was lost very early on. As the 15th Finance Commission pointed out, the effective weighted average GST rate at the time of inception was 14-14.4%, as against a much higher pre-GST weighted average rate. An RBI study says this has come down to 11.6%; the IMF estimates the current effective tax rate at 11.8%.

Despite this, GST seems to have settled down. Revenue is doing well. The gross revenue crossed Rs 1.3 lakh crore for the second month running in November. There is close coordination between CBDT, GSTN and CBIC, reflected in the increase in tax revenue.

It was felt that this was the ideal time to rationalise rates. In September, the GST Council constituted a Group of Ministers (GoM) headed by the Karnataka Chief Minister to do so. Its task included reviewing tax rates, exemptions, inverted duty structure. It was to submit its report within two months — in effect, by end of November, but it has not done so yet.

In the meantime, reports suggested that the GST Fitment Committee of officers had recommended rates to the GoM – to raise the slab of 5% to 7% and 18% to 20% and the rate on precious metals from 3% to 5%.

Prof S Mukherjee of the National Institute of Public Finance & Policy has in a mid-November working paper (No 358) suggested a merger of the 12% and 18 % slabs into 15%, increasing the 5% slab to 8% and 28% to 30%.

While all this was being discussed, a prominent business channel broke the news that the government had requested the GoM to defer its report. The reasons speculated were many — GST revenue stabilising, the possible impact of a hike in rates on inflation, and the “volatile political situation”, a euphemism for the fact that important state elections are round the corner.

There is no denying that GST revenue is doing well. Any rationalisation at this juncture would most certainly have an impact, and not necessarily a positive one at that.

Despite revenues having done well, the fact remains that expenditure also has ballooned to offset the pandemic-driven stress. Fiscal deficit during April-October touched Rs 5.5 lakh crore. Overall debt outstanding to GDP ratio for both the Centre and the states has gone up sharply. The progress on disinvestment has been muted. The target of Rs 1.75 lakh crore is some distance away despite the sale of Air India.

The NSO data shows that retail inflation (consumer price index) has increased to a three-month high of 4.91%. Worrying still is the fact that food inflation has increased to 1.87% from 0.85% in October. Private consumption, as well as investments, continue to be subdued.

Any rationalisation of slabs would necessarily involve goods from the 12% slab moving up. And going by the recommendations of the Fitment Committee and NIPFP, it could also mean the 5% slab being moving up to 7-8%. There is no doubt that these will have (political and) inflationary consequences. And there is still no certainty as to how Omicron will pan out and the impact it will have on the economy. There are too many unknowns.

It is also understood that the Textile Ministry has requested that the rate rationalisation done to correct the inverted duty structure and effective from January 1, be put on hold. If this is indeed correct, it is strange, to say the least. The correction of the inverted duty structure was done at the behest of the industry. So, if even mere rate rationalisation is going to be such a challenge, any convergence of rates will take a lot of effort.

The GST Council should continue to focus on easing compliance, tightening enforcement and making technology robust. GSTN data suggests that out of some 1.35 crore registrants, only about 35 lakh pay taxes in cash. This needs a closer examination. As does the regular debate on the inclusion of petroleum products, land and electricity within the GST fold.

While the convergence of rates is desirable, the decision to defer it for the present is wise. Convergence should be done after a more informed public debate. It should be ensured that sufficient lead time is given for both industry and GSTN to prepare themselves. Ideally, there should be certainty in any change of tax slab. Any change going forward should be implemented from the beginning of the fiscal year. Mid-year corrections should be avoided, except in cases of emergency, like the Covid-related exemptions.

(The writer is a former chairman of the Central Board of Indirect Taxes & Customs)