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Informist, Wednesday, Jul 24, 2024

 

By Priyasmita Dutta and Pratiksha

 

NEW DELHI – By cutting customs duty on precious metals, including gold, sharply to 6%, the government tried to kill two birds with one stone. The surprise move, announced by Finance Minister Nirmala Sitharaman in the Budget for 2024-25 (Apr-Mar), will give impetus to the gems and jewellery sector and also keep a check on smuggling of the yellow metal, Central Board of Indirect Taxes and Customs Chairman Sanjay Kumar Agarwal said today.

 

"On gold, there was representation from the gems and jewellery sector, which provides a lot of employment. 50 lakh (5 mln) people are engaged in that particular sector," Agarwal told Informist. "Exports are also huge from that sector – 8% of total exports. So, one is that it is a raw material for them and there is a capital blockage. The rate of duty was high for any kind of production in the country, so to encourage that sector and to provide the material for exports, rates were to be rationalised." 

 

In her Budget speech on Tuesday, Sitharaman had said, "To enhance domestic value addition in gold and precious metal jewellery in the country, I propose to reduce customs duties on gold and silver to 6% and that on platinum to 6.4%."

 

Agarwal said that a lot of gold smuggling cases were detected in 2023-24, with total seizures made by the customs department in the last financial year being to the tune of 4.8 tn of gold. In 2023-24, India's imports of gold rose 37.1% on year to $6.45 bln. 

 

"Smuggling rises on rate arbitrage. Wherever there is a rate arbitrage and arbitrage is bigger than the cost, then there can be an attempt to smuggle," he said. "I am not saying that if there is no rate arbitrage, then the smuggling will completely stop...people may still smuggle for whatsoever reason. But the tendency to smuggle will drastically come down," he added.

 

This is in contrast to what Sitharaman had previously said – that there was no direct correlation between smuggling and customs duties. 

 

Besides rationalisation of customs duties, Sitharaman, in her Budget speech, also spoke about the government's intent to simplify and rationalise the goods and services tax structure and endeavour to expand it to the remaining sectors.

 

Speaking about the new indirect tax regime, Agarwal said the growth in GST collections that could have come from simplification of the system and integration of processes has already happened and, going forward, its collection would depend on how the economy grows.

 

He said that the tax buoyancy expected from increased compliance has already happened. "That is now plateauing."

 

For the current financial year, the Budget has projected the Centre's GST collections to grow 11% on year, slightly higher than the 10.5% nominal GDP growth assumed for the current fiscal year. Though there is buoyancy in collections, the Budget cut the Centre's GST mop-up aim for this year by about 60 bln rupees from what was projected in the Interim Budget. 

 

For the first four months of the current fiscal year, GST collections have averaged 1.83 trln rupees, data shows. 

 

The Budget has set a target that is not too high and is achievable, based on the latest economic data available to the government. "We are confident that we will achieve it. But it will again depend upon the geopolitical situation, how the economy will grow. There should not be any disruptions," he said. 

 

In the context of economic growth and GST, many experts had said that reduction in GST burden might increase consumption in the economy. Private final consumption expenditure grew at the slowest pace on record in 2023-24, not counting the pandemic-hit year of 2020-21. In fact, this conversation came up many times during the Budget-making process. 

 

Unlike direct taxes, any changes to GST rates require a nod from the GST Council, of which states are members, and any reduction would dent revenues of both the Centre and states. Besides, it is a matter that the rate rationalisation panel of the GST Council is currently looking into, Agarwal said. "The rate rationalisation exercise will definitely ensure that there is revenue neutrality," he said.

 

Agarwal, however, said there was limited scope for the Council to lower the tax burden "drastically". "Rationalisation does not mean that rates will have to be brought down," he said. "In fact, GST rates in India as compared to most other countries are lower. For example, European Union, the rates are normally 21%," he said.

 

Currently, the GST regime has four tax slabs – 5%, 12%, 18% and 28%. Agarwal said that merging of tax slabs was very much on the agenda of the rate rationalisation panel, and he "hopes that they will be finalising their report soon".

 

The next meeting of the GST Council might be held towards the end of August, he said. 

 

Another pending item with the rate rationalisation panel is to see what happens to the compensation cess beyond March 2026. Agarwal said that the compensation cess was imposed for a particular reason and would have to be discontinued after March 2026 as per the constitutional mandate, but the Council might take a call if it wants to look at "additional revenue raising measure" to mobilise revenues. 

 

When the GST regime was introduced in 2017, the Centre had promised to protect 14% revenue growth for states for the first five years by levying a cess on some luxury items. The five-year period ended in June 2022. The GST Council in September 2021 approved extending the compensation cess levy till March 2026 to service the loan taken to offset the shortfall in revenue collections. The Centre borrowed 2.69 trln rupees in 2020-21 and 2021-22 and passed it on to states as back-to-back loans when GST collections dwindled during the pandemic. 

 

At the meeting on Oct 7, the GST Council had decided to start looking into the matter of compensation cess in preparation for the discontinuation deadline of March 2026.  More

 

Edited by Avishek Dutta

 

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