Informist, Wednesday, Sep 11, 2024

--Govt source: Merging of GST slabs likely to be delayed to FY27

--Govt source: To merge GST slabs once compensation cess path decided

--Govt source: States worried about GST revenue post cess removal

By Priyasmita Dutta

NEW DELHI – The government's plan to merge the four goods and services tax slabs into three is likely to be postponed to as late as 2026-27 (Apr-Mar), a senior finance ministry official said. The government will decide on the rationalisation of slabs only after there is clarity on the future of the compensation cess, the official said.

Currently, under the GST regime, there are four slabs – 5%,12%,18% and 28%. The group of ministers on rate rationalisation are considering merging the 12% and 18% slabs and replacing them with a 15% slab.

"GST slab rationalisation is still on the cards but the urgency of implementing it is gone as there is a more important task now... deciding the future of the compensation cess... what happens to it after it is discontinued?... how to introduce a new tax?" the official told Informist.

There is consensus among states that GST slabs should not be tinkered at a time when there is pressure on state revenues and a lack of clarity on the future of the compensation cess, the official said.

CESS UNCERTAINTY

In order to bring states on board to adopt the GST regime in 2017, the Centre had promised to protect 14% revenue growth for states for the first five years by levying a cess on certain luxury and sin items such as tobacco items, motor vehicles, expensive motorcycles, caffeinated beverages and aerated drinks. Originally, the GST compensation cess was to be discontinued after June 2022.

However, the GST Council extended the compensation cess till March 2026 to repay loans taken due to shortfall in cess collections during the COVID-19 pandemic. The Centre borrowed an additional 2.69 trln rupees from the market in 2020-21 and 2021-22 and passed them on to states as back-to-back loans.

Finance Minister Nirmala Sitharaman on Monday said that according to internal calculations, at the current pace of compensation cess collection and the repayment schedule, the loan is likely to be repaid along with interest by December 2025 or January 2026. In that case, the GST compensation cess is likely to be discontinued in December 2025 or January 2026.

The GST Council on Monday decided to set up a group of ministers to decide on the future of the compensation cess after the repayment of the loan. The panel will submit its report, latest by January 2026.

Once the panel's report is accepted by the GST Council, the Centre and states will monitor growth in taxes for a few months and only if the situation improves, will they consider tinkering with the slabs, the official said.

A straightforward plan would be to stop the GST compensation levy as soon as there are sufficient funds to clear the loan. The official said the states are not at all comfortable letting go of the revenue coming in from the compensation cess. Moreover, the industry and consumers have now 'normalised' the burden of cess, so an equivalent component will not pinch the taxpayers incrementally, the official said.

At the GST Council meeting held on Monday, many states expressed concerns about lower revenue growth, the official who was part of the meeting said. "Most states' revenue growth is in the range of 8-10%. Few are doing better, few are doing much worse," the official said.

LIFE AFTER CESS

Given the reluctance among state governments to part with the cess, chances are that the levy will be subsumed into the GST tax slabs. Revenue Secretary Sanjay Malhotra told Informist in July that the government plans to add an additional component to the 28% GST slab on sin goods and luxury goods after the cess is stopped.

Without taking into account the impact of a possible subsumption of the cess, rationalising the GST slabs would be a futile exercise, the official said. On the other hand, implementing both changes at the same time would be disruptive. "There has to be continuity somewhere. Making changes to the slabs, as well as introducing a new tax about which no one has any clarity, will lead to a lot of disturbance in the system," the official said.

The official also said that the rate rationalisation panel will need to do a thorough study on the revenue loss or gain that will happen if the tax slabs are tweaked. Currently, monthly GST collections are growing at about 10% on a yearly basis. The rate rationalisation panel has to ensure that at least this growth in tax collections is maintained after tinkering with the slabs. "Ideally, the job is to ensure that revenue collections are not just protected but are improved," the official said.

The rate rationalisation panel of the GST Council is scheduled to meet on Sep 23 to hold further discussions. The panel was set up in 2021 to simplify the GST structure, rationalise and correct inverted duty structure, and review exemptions. The panel, which is headed by Bihar Deputy Chief Minister Samrat Chaudhary, has Kerala Finance Minister K.N. Balagopal, Uttar Pradesh Finance Minister Suresh Kumar Khanna, Goa Transport Minister Mauvin Godinho and Rajasthan Medical and Health Services Minister Gajendra Singh as members. End

Edited by Saji George Titus

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