For the first time since March 2020 when the Covid-19 pandemic hit India, the GST Council meeting on Friday in Lucknow will have all the members present physically. Finance Minister Nirmala Sitharaman will chair the meeting, and it will be attended by representatives of 28 states and three Union Territories to discuss items that may both reduce and increase the burden on consumers.
The revision in rates of more than 50 goods and services along with a discussion on bringing petroleum products like petrol, diesel and aviation fuel under the ambit of GST on the agenda of the council’s meeting.
But the meeting is expected to dedicate a lot of time to the issue of compensation to states for revenue losses due to the GST regime.
The GST Act that came into effect from July 1, 2017 provided an assurance to states that if the growth in revenue post GST was less than 14 per cent, they will get compensated for the shortfall for a period of 5 years through special cess on certain category of goods such as automobiles and tobacco products.
Facing a shortfall, states have pressed for extending the compensation regime beyond June 2022 deadline. Their argument is that the pandemic has caused a major setback in revenue and their burden has gone up.
Since April 2021, the GST revenue had started diminishing and the trend continued during the last fiscal year and early part of this year. It was only during the last few months that GST collection remained above Rs 1 lakh crore.
To tide over the shortfall the GST Council approved a mechanism which included special borrowing by the Centre for the states and compensation cess was to be used for Interest and repayment of principal amount.
Under the special borrowing scheme approved by the RBI for FY 2020-21, the total borrowing for states was around Rs 1.10 lakh crore. In FY2021-22, Rs 75,000 crore has already been borrowed, and it’s estimated that the borrowing for the states during the fiscal would exceed Rs 1.5 lakh crore.
To reduce the burden on states, the GST Council has already said yes to the existence of compensation cess beyond the June 2022 deadline. This will help the states repay almost Rs 2.6 lakh crore principal amount of borrowing along with the interest. But states want more.
States are saying that beyond the assistance of cess for paying back the borrowing, they want the compensation for shortfall in revenue due to GST being in play beyond June 2022 when the mandatory five-year deadline ends.
It is expected that the Centre will talk about more revenue enhancement measures through increasing compliance and rationalisation of duties.
The Centre is hesitant to agree to a blanket extension of the June 2022 deadline for compensation for revenue shortfall and a 14 per cent hike by states. So, during today’s meeting of the council, the Centre is expected to meet demands regarding compensation for revenue shortfall, with proposals to ramp up the revenue generation through duty rationalisation and administrative measures.
Sources in the government said that the Centre may link compensation to performance by states on tax collection and compliance criteria.
This is based on a detailed rating of states and indicates that some have been lethargic. The 15th Finance Commission had noted in its report flagged that “an assurance of 14 per cent growth rate for five years, by treating all the states on par in terms of GST revenue growth, irrespective of their wide-ranging revenue growth experiences in the past, has created another significant complication in federal finance.”
There is empirical evidence that while states, such Himachal Pradesh, Uttarakhand, J&K and those in the Northeast need helping hand as Central Sales Tax was a key source of revenue.
Average growth of GST collection in 2018-19 and 2019-20 was highest in Bihar, Assam, Jharkhand, Odisha, and Madhya Pradesh. It was lowest in Maharashtra, Gujarat, Tamil Nadu, Kerala, and Delhi. This means while the poor States recorded the highest growth, the richer States had lower growth. These low performers a were found to have reduced the GST enforcement setup which is key element for tax compliance.
However, there are indications that compensation cess and compensation mechanism in some form are likely to continue for a period beyond the five years mandated by the law and that’s the bad news the Lucknow meet may send to the consumers.
WHAT ELSE IS ON THE AGENDA?
The other big focus of the meet will be the GST rate change and/or amendments in regulations related to more than 50 goods and services. The GST Council is also expected to take up a new matrix to tackle rising instances of profiteering that are not letting the consumers benefit from the positives of the GST regime. Correction in inversion of duties on footwear and textiles, relief in form of duty reduction on medicines and articles needed to battle Covid-19 pandemic and making GST less painful for businesses which are onboard are also on the agenda.
PETROLEUM PRODUCTS UNDER GST
In June, the Kerala High Court, based on a writ petition, asked the GST Council to decide on bringing petrol and diesel within the GST ambit. The Council was given six weeks’ time to take a view on petrol, diesel and three other petroleum products as the current prices due to high levies are burning a hole in domestic budgets. Currently, for a litre of petrol in Delhi, customers are paying almost 60 per cent in central and state levies, while it is 41 per cent in case of diesel.
However, so high is the dependence of states and the Centre on the revenue from fuels that the proposal may virtually find zero support. Karnataka, Kerala and Maharashtra governments have already spoken against the proposal.
Kerala Finance Minister KN Balagopal ruled that the state will strongly oppose if there is any move to bring petrol and diesel under the GST regime as Kerala will lose Rs 8,000 crore annually. He added that fuel prices have shot up due to the hiking of cess by the Centre.
Interestingly, BJP-ruled state Karnataka has joined the opposition-ruled states in demanding longer compensation and opposing the proposal to include petrol and diesel under the GST regime.
Karnataka Chief Minister Basavaraj Bommai, who holds the finance portfolio, will not be attending the meet and has authorised the State Commercial Tax Commissioner C Shikha to participate. She is expected to carry two letters form the CM — one seeking compensation for two more years and the second the states stand against fuels being added to GST list.
Maharashtra deputy chief minister Ajit Pawar who holds the finance portfolio has similar views. He said, “The Centre should not touch areas that are under the state’s jurisdiction. The move will hurt the states as apart from Excise and stamp duty, the largest pool of revenue for the state government is from the GST.”
FOOD DELIVERY APPS
Another crucial agenda is the proposal for bringing e-commerce operators dealing in the delivery of food such as Zomato and Swiggy under the GST regime and levy GST on restaurant services supplied through them.
At present, these apps are registered as Tax Collectors at Source (TCS). Sources in the government say that apps like Zomato are registered as TCS, and they do not carry out mandatory GST registration checks on restaurants that are not part of the GST system but are part of their supply chain.
As per the government’s assessment, food delivery is a now thriving business and council’s estimation, the revenue loss in the segment could be as high as Rs 2,000 crore. Tax analysis teams have been studying the possible gap between the taxable turnover provided by Swiggy and Zomato compared to that provided by the food supplier.
The suggestion has been made by the Fitment Committee of the GST Council. This committee has proposed that it should be clarified by way of a circular that serving of food, door delivery and take away by cloud kitchens/central kitchens are covered under “restaurant service”.
The committee has proposed two options. One involves notifying ECOs as “deemed supplier” under two categories — from the restaurant to ECO with tax rate of 5 per cent without input credit and 18 per cent with input credit and from ECO to the customer attracting 5 per cent with limited Input tax Credit
The second proposal is to notify the ECOs as aggregators and fixing the rate later. With this move ECOs would have to pay GST for all supplies made for restaurant service.
However, to tackle the problem that this may not be applicable to the restaurants in hotels with tariffs higher than Rs 7,500, there is a proposal for a separate return with GSTIN based details of the tax being collected and paid by ECOs to be declared.
Since there is a Rs 20 lakh base limit for service providers to get registered, the proposal is to include all restaurant service under the category of Aggregator and ECOs as aggregator of delivery services
Sources say that once cleared by the council, the operators may get three months time to make all the changes to their software to come on board the GST system.
The Fitment committee has proposed an 18 per cent GST on coconut oil marketed in containers which are lesser than 1 litre and 5 per cent on the above 1 litre category. The committee took that decision after studying a very complex situation
Coconut oil is used as an edible oil attracting 5 per cent GST while hair oil attracts 18 per cent GST. The committee says that when coconut oil is sold in small containers the containers or labels state “hair oil”, “edible oil”, “pure coconut oil” or “coconut oil”. Even major brands which advertise the oil as a hair oil, do not mention hair oil in their packs and label them as coconut oil and also print the FSSAI registration number. Since coconut oil for hair was being passed off as edible oil, it led to a revenue loss that needed to be plugged.
Instead of making a distinction on the basis of usage, the committee has kept in mind the general consumption pattern and proposed that coconut oil, when packed and sold in a unit container of less than 1000 millilitres may be classified as a hair oil (attracting a GST rate of 18 per cent, irrespective of its actual end-usage). Edible coconut oil, when packed and sold in a unit container of 1000 millilitre or above, should be subjected to GST at the rate of 5 per cent
This way consumers who on a monthly basis use coconut oil for cooking purposes can avail of the lower tax slab by buying larger packages of the product
The GST Council is expected to consider options for the National Anti-Profiteering Authority (NAA), whose four-year term is coming to end on November 30. Options include handing over profiteering matters to Competition Commission of India or any other body. The four-year terms of the NAA has been marred by very high number of litigations challenging almost every anti-profiteering rules.
In tomorrow’s GST Council meeting, the tax concession on 11 Covid drugs is likely to be finalised.
The Council on Friday may also discuss the proposal of reducing GST from 12 per cent to 5 per cent for seven more drugs, including Itolizumab, Posaconazole, Infliximab, Bamlanivimab and Etesevimab, Casirivimab and Imdevimab, 2-Deoxy-D-Glucose and Favipiravir, till December 31, 2021.
The GST Council will also discuss the interim report of a state-ministerial panel on capacity based taxation on pan masala and composition scheme for brick kilns and stone crushers.
The council will review and also clarify regarding GST rates of 32 goods and 29 services.
The items under review are Zolgensma and Viltepso medicines for personal use, solar PV modules, copper concentrate, carbonated beverage with fruit juice, coconut oil, scented sweet supari, oncology medicine, and diesel-electric locomotives.