GST Council defers key decisions, tackles complexity of tax system

The 55th meeting of the Goods and Services Tax (GST) Council last week took some decisions and deferred some to a later date. Some of the decisions and clarifications once again underlined the inherent complexity of the indirect tax system. In a relief to small borrowers, the Council clarified that no GST was payable on the penal charges levied by lenders for non-compliance with loan terms. Further, it recommended lowering GST on fortified rice kernels of a certain variety and exempting the tax on gene therapy. The applicable tax rate on the sale of used vehicles, including electric vehicles, was harmonised at 18 per cent.

  However, the much-anticipated decision related to GST on insurance was deferred. A section of the people who pay their insurance premiums around this time of the year were hoping for relief. The group of ministers (GoM) on rate rationalisation also asked for more time. Another GoM, which is reviewing the compensation cess, too, was given an extension. It is worth recalling that the compensation cess is being collected to repay the debt incurred to compensate states during the pandemic. Once the principal and interest are fully repaid, collection will have to be discontinued unless necessary legal changes are implemented. It is thus important that both the GoMs, on rate rationalisation and the cess, submit their recommendations as soon as possible. For the stability of the tax system, it is crucial for the GST Council to simultaneously consider the recommendations of both GoMs, to simplify the tax structure, and take the tax rate to the revenue-neutral level. All this will not be easy and might need several meetings of the GST Council. The Council would do well to take experts on board and fix all possible shortcomings during this exercise.

  One of the clarifications issued on Saturday underscored how complex the tax system was and why it needed urgent changes. It was clarified that ready-to-eat popcorn mixed with salt and spices attracted a 5 per cent GST rate. It attracts a 12 per cent tax if supplied as pre-packed and labelled. This is not enough. If popcorn is mixed with sugar — caramel popcorn, for example — it becomes sugar confectionary and is taxed at 18 per cent. Although no new tax was imposed on popcorn last week, the clarification was widely commented on social media for the right reasons. This is an example of the complexity of the GST design and what businesses are dealing with. This is exactly what the Council needs to fix. India not only has too many GST slabs, but the same goods are often taxed at different rates, depending on factors such as packaging and size. It is hard to comprehend why food items can’t be taxed at one rate, irrespective of how they look or taste. The government does not need to influence consumer choices at every stage. 

Among other issues, states rejected the idea of bringing aviation turbine fuel under GST. The issue must be revisited. In fact, bringing all petroleum products under GST will make the tax system more efficient. Another proposal was to impose a cess on the top GST rate in cases of natural disasters. The Council should not consider any such proposal because it will further complicate the tax system. In any case, both Union and state governments must build fiscal buffers in normal times to deal with potential shocks. Imposing a cess for every challenge is no solution.