Gadkari’s thoughts on completely removing the levy are, however, impractical as it would disrupt the GST chain, said the report (by Sidhartha). A complete removal would impact refunds for those selling goods or services to insurers. While a complete removal does not appear possible, there are strong arguments for reducing this tax.
Approximately six months ago, a parliamentary standing committee led by Jayant Sinha also highlighted the need to reduce GST on health and term insurance. The current tax environment imposes significant levies not only on insurance but also on other essential services such as telecom, which also attracts an 18 per cent GST. Air conditioners and cement, categorised under demerit goods, attract a 28 percent GST, with the GST Council, comprising Union and state finance ministers, ignoring repeated demands for tax cuts despite the essential nature of these items.
An examination of any car purchase invoice reveals substantial taxes paid both to the central and state governments. A “luxury vehicle” longer than 4 meters is subject to a 43 per cent GST. This is in addition to high registration costs and motor insurance premiums that increase even without claims, compounded by an 18 per cent GST. For sin goods like gutka or pan masala, the effective tax rate reaches triple digits.
The GST Council has been discussing the need to review these rates for several years but has refrained from making changes, even as tax collections have consistently increased, the report said. As of now, any review seems months away. A panel of ministers, led by Bihar’s Deputy Chief Minister Samrat Chaudhary, is required to draft a blueprint. This blueprint will undergo item-by-item review by the GST Council secretariat to prevent revenue loss. Only after that can a review be done.
The rationalisation of GST rates is overdue and was initially planned to be carried out a few years after GST’s implementation. However, the COVID-19 pandemic disrupted these plans. Despite many quarters blaming the finance ministry for high tax rates, officials point to states’ reluctance due to fears of revenue losses, especially with the phasing out of the compensation cess.
Adding to the complexity are higher inflation rates and the proposal to merge the 12 per cent and 18 per cent GST rates into a median rate of 15-16 per cent. This merger would slightly reduce rates for items like biscuits, ice cream, paints, refrigerators, TV sets (up to 32 inches), insurance, and telecom services. However, it would increase prices for items like bicycles, clothing, footwear costing up to Rs 1,000 per pair, pencils, pre-packed namkeen, bhujia and several other food items, which would then attract higher than the current 12 per cent tax.
Additionally, this rationalisation would require raising the 5 per cent GST rate to 7-8 per cent to maintain steady revenue and narrow the difference between the new median rate and the rate for merit goods. For the government, nearly two-thirds of the revenue comes from the 18 per cent slab, with another 15-20 per cent from items that fetch 28 per cent. While a third of goods, mostly household items, are in the 5 per cent segment, their contribution to total revenue is minimal, staying in the single digits. There’s even a suggestion to bring some currently tax-exempt goods under the GST umbrella.
“This is a good time to move ahead with rationalisation, which cannot be done overnight as the entire exercise will take a few months. The revenue situation has improved considerably, the economy is doing well and inflation has eased and is likely to improve further,” ToI’s report said quoting former CBIC chairman Vivek Johri.
Tax experts have long been calling for these changes. “The process of rationalising the rates of GST and compressing the rate slabs in GST should now begin as the tax has now entered a stable phase with stable collections, increased compliance, and the growing focus on audits. Tax simplification has, in the past, led to increased collections arising from improved acceptance and the resultant growth in the number of compliant taxpayers,” M S Mani, partner at Deloitte India, told the newspaper.
The GST Council will also need to chart out a plan for cess on items like tobacco products, pan masala, automobiles, coal, and soft drinks. Nevertheless, the rationalisation process carries its own set of challenges. For instance, lowering GST on insurance to the lowest slab would mean higher levies on several inputs and larger refund outgo than the tax collected at the final stage, complicating the refund process.