GST Council may soon bring higher GST and fewer rates

Ruchi Gandhi

16 Mar, 2023

The GST Council determines the slab rates of GST on different goods and services. The Council also reviews the slab rates for goods and services on a regular basis. In fact, since the beginning of the Goods and Services Tax, the GST Council has several times revised the GST rates for a variety of products.

A simpler tax structure for GST

According to people familiar with the GST regime and industry sources, India may consider raising taxes on some goods and services as a first step towards enabling a simpler tax structure, that too with fewer rates.

The Indian government wants the goods and services tax (GST) to have fewer tax brackets. K V Subramanian, the Chief Economic Advisor, recently stated that GST could be made into a three-rate structure by combining two existing tax slabs.

For this purpose, a panel on goods and services tax, led by Honourable Finance Minister, Nirmala Sitharaman, is expected to meet in December this year to discuss the changes to be made to the current four-rate system.

India currently levies five percent, twelve percent, eighteen percent, and twenty-eight percent taxes on all goods and services produced in the country, with food items & necessities getting the lowest rate and sin and luxury goods attracting the highest rate. Furthermore, gold is taxed at a rate of 3%, while rough precious and semi-precious stones are taxed at a special rate of 0.25 percent under GST.

According to the sources, the two lowest rates could be raised by a percentage point to 6 percent and 13 percent, respectively. While the rates will eventually be reduced to three as part of a phased reduction plan, it is expected that a group of state finance ministers will submit proposals by the end of the next month.

Some experts also believe that it is possible that the GST tax structure will eventually be reduced to just two slabs. The recent decision to raise the GST on pens, cartons, bags, plastics, and cards to 18 percent is part of that strategy.

In the 45th GST Council meeting held on 17th September 2021, cartons, boxes, bags, plastic products, metal ores, packing containers of paper, scented sweet supari, cards, catalogues, and printed material, as well as other products that were previously taxed at 5% or 12%, have been moved to 18% bracket. Even those who are not well off use the majority of these generally utilized items. And the last thing they need is a tax increase on them.

However, some other GST rates, for example, GST for retro fitment kits for vehicles used by persons with disabilities, fortified rice kernels, Keytruda medicine for the treatment/ cure of cancer, and biofuel supplied to oil marketing companies (OMCs), among others, were decreased to 5%.

Higher GST and fewer rates to bring rationalization

Although fewer slabs will make it easier for businesses to pay taxes, it is possible that some key products and services will become more expensive, which is a concern that the government must address.

These developments emerge as the central government intends to move to a twin-tax structure under the GST regimen. The most important reason for this rationalization is to correct the inverted duty structure, which causes problems when claiming the net input tax credit.

An inverted duty structure in the GST regime is a situation where inputs or raw materials are taxed at a higher rate than the output or finished products meant for sale. In other words, an inverted duty structure arises when the tax paid in respect of inward supplies is more than the tax payable in respect of outward supplies.

For example, A Ltd is a company that manufactures product X, for which the company purchases input material at 18 percent GST and pays GST to its supplier of rupees 5 lakh, and the final product X has 12 percent GST and collects rupees 1.50 lakh from the customer. In this case, A Ltd is paying more GST on the inputs used than on the manufactured output. Inverted duty structure is the name given for this type of transaction.

All businesses pay GST on procurements made during the course of business, consisting of capital goods, inputs such as raw materials, consumables, etc. as well as input services. The formula that is set forth in the legislation enables a refund of GST paid on these inputs. Moreover, in cases where the rate of tax on inputs is higher than the rate of tax on output supplies, Section 54(3) of the Central GST law^[1] mandates a refund of any unutilized input tax credit.

But still, claiming a refund of the unutilized input tax credit under the inverted duty structure of GST has been a long-pending concern for most businesses because of higher levies on raw materials compared to their respective finished goods.

By bringing forward a uniform tax structure with fewer GST rates, the government gradually seeks to bring rationalization to reduce the difficulties faced due to an inverted duty structure.

Takeaway

The proposal to raise GST rates is made at a time when key Indian states prepare for elections early next year, which could make it an unpopular move in a country. However, this proposal might be considering the fact that the country is still dealing with the fallout from the disruptions caused by the coronavirus pandemic.

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