Informist, Thursday, Jul 25, 2024

--Revenue secy: 1% tax at source to help tap high-income taxpayers
--Revenue secy: Old tax regime to die its natural death
--Revenue secy: Sin goods GST hike to shield revenue of states, Centre
--Revenue secy: Higher GST on sin goods will ensure no revenue lost
--Revenue secy: GST Council to take call on sin goods tax revision
--Revenue secy: GST on sin goods may be hiked post GST loan repayment
--Revenue secy: May stop GST compensation cess levy post Sep 2025

By Sagar Sen and Priyasmita Dutta

NEW DELHI – The government plans to stop levying the compensation cess once outstanding goods and services tax-related debts are settled, and in lieu, add an additional component to the 28% GST rate which is levied on sin goods, Revenue Secretary Sanjay Malhotra said today.

"Once the compensation dues have all been cleared, then we will collect it as GST. Compensation cess will be withdrawn, something else will come. As soon as it ends, we will introduce a new GST or increase the 28% GST on those items. There is no proposal to increase the tax incidence," he said.

Malhotra said the GST Council will take a final call on the modalities and the new tax rate for sin goods that are taxed at the highest rate of 28% currently, along with compensation cess. He said the aim will be to maintain revenue at the current levels for both the Centre and the state governments. "The Council will take the final call on what form this extra GST will be levied, and what the distribution system will be with the states. Normal GST is shared with states, but the Council will take the final call."

"This new form of tax will be on all goods on which there is a compensation cess currently. Compensation cess will be levied till March 2026 or till the time that we are able to clear the compensation debt liabilities. March 2026 is the outer limit, it can even end before it," Malhotra said.

The centre, in order to bring states on board to adopt the GST regime in 2017, 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 tobbacco items, motor vehicles, expensive motorcycles, caffeinated beverages and aerated drinks. Originally, the collection of GST compensation cess was to be discontinued in June 2022.

However, the GST collections dwindled 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 on these funds to states as back-to-back loans to partly meet the shortfall in collections. The loans were to be repaid from the GST compensation cess collections. So far, the government has redeemed 781.04 bln rupees worth of such bonds in 2023-24, and a total of 1.91 trln rupees worth of these bonds were scheduled to mature in 2025-26 and 2026-27. The government will prepay 1.24 trln rupees worth of the outstanding GST-related debt in the current financial year. Deducting this, the government will be left with an estimated repayment of around 670 bln rupees. The GST Council extended the compensation cess till March 2026 to pay interest and repay the loans.

In its meeting held on October 2023, the GST Council had decided to start looking into the matter of the compensation cess in preparation for the discontinuation deadline of March 2026.

Malhotra said, according to an internal assessment, these loans may be repaid by September 2025. In that case, the compensation cess collected will be distributed between Centre and states according to a pre-decided formula, which again will be decided by the GST Council. "We will remove it before March 2026 if we are able to meet the liabilities. And we will collect it in some other form of GST. The GST rate will go up from 28% to something."

"We will not keep any extra collection under compensation cess with us," he said.

In his interview, Malhotra also said that there are too many rates in customs duty structure and it needs rationalisation. "The reduction announced in the Budget is primarily aimed at the number of customs duties."

On the direct tax side, however, he said that there was no proposal under consideration to further reduce the number of slabs in the new tax regime of personal income tax. The Budget for 2023-24 had reduced the number of tax slabs to six from seven under the new tax regime.

Below are edited excerpts of the interview where he shared his insights on the avatar of Vivad Se Vishwas Scheme and other announcements made in Budget:

Q. The compensation cess collected under GST regime is currently being utilised to repay the debt that was taken to compensate for their revenue loss during the COVID-19 pandemic. What is the plan for the compensation cess once the debt is repaid and perhaps there is a residual fund under it before March 2026?

A. We will not keep any extra collection under compensation cess with us. Once the compensation dues have all been cleared, we will collect it as GST. Compensation cess will be withdrawn, something else will come. The compensation cess will be removed on certain goods like automobiles etc. We will remove it before March 2026 if we are able to meet the liabilities. And we will collect it in some other form of GST. The GST rate will go up from 28% to something. The council will take a final call...there is time.

This new GST tax will be on all goods on which there is a compensation cess currently. Compensation cess will be levied till March 2026 or till the time that we are able to clear the compensation debt liabilities. March 2026 is the outer limit, it can even end before it. As soon as it ends, we will introduce a new GST or increase the 28% GST on those items.

The (GST) Council will take the final call on what form this extra GST will be levied, and what the distribution system will be with the states. Normal GST is shared with states but the council will take the final call. There will not be a substantial reduction in the total tax paid in the GST and compensation cess currently. It will take us more than one year to repay the GST debt...not before September 2025. There is no proposal, however, to increase tax incidence.

Q. At a time when there are discussions on merging tax slabs on the GST front, the income tax regime has six different tax slabs. Is there a plan to review those?

A. See direct taxes and indirect taxes are two totally different things. Secondly, so far as indirect taxes are concerned, there are two systems--GST and customs. In customs, the number of tax rates are too many. They are in double digits. The reduction announced in the Budget is primarily aimed at the number of customs duties.

There is no proposal, in the short to medium term, to reduce the number of tax slabs on the income tax side.

Q. Currently, we have both the old tax regime and the new tax regime running together. Is it sustainable to continue both the regimes together?

A. Obviously, in the long run, continuing two regimes perhaps may not make sense, but the finance minister is on record to say that there is no sunset date for the old regime. About 70% of taxpayers have shifted to the new tax regime. Hopefully, this trend continues. There would hardly be anyone in the old regime. So it will die its natural death, hopefully.

Q. The Budget proposed to review the Income Tax Act. What will be the main objective of this review?

A. The primary purpose is to make it readable. Because there are a number of sections, a number of provisions, and exceptions, so that makes readability difficult. There are a number of subjects which are spread over multiple chapters, multiple sections. There are obsolete provisions. Work will begin soon, and we aim to complete this within six months. The endeavour is to finish it before the next Budget.

As a by-product, there may be some other substantive provisions which may also get looked into and rationalised. That's more of a by-product.

Q. States are going to be urged to cut the stamp duty that they are charging. However, that will hit their revenue. How do you plan to overcome that challenge?

A. If the duties and taxes are very high, then there is under-reporting of income and the Laffer curve sets in--because the higher the taxes, higher will be evasion. So higher taxes do not necessarily mean higher revenue. Lower taxes can actually result in higher revenues also. As more income gets reported, there's less inclination to hide and evade taxes. There is a lot of under-reporting of income in real estate sector especially. It will have two benefits--one is that these transactions will get recorded so that there are fewer disputes, and the other is that it also helps with the revenue.

Q. The Budget also proposed 1% tax collected at source on items worth above 1 mln rupees. Can you shed some light on these items?

A. The items have not yet been decided, but any item which is in the nature of a luxury could be under this provision, like shoes, purse, watches, sunglasses...could be any luxury good. These will be the people who have the money to afford luxury goods...the higher income classes who will have to pay this tax. It could be any individual, it could be a salaried class (taxpayer)...it could be people in business...on the manufacturing side, also traders.

Q. Income tax collections between Apr 1-Jul 11 has grown over 21%. But the Budget has projected the full year's income tax growth at 13.6%. Why has it been revised downwards? Do you see any risks from low corporate tax collections?

A. That is just a quarter's data. The economy is expected to grow at 10.5%, so if the revenues are projected to grow at 13.6% on the direct tax side, then it's a huge buoyancy of 1.25. So it is fine.

But on the corporate tax side, the profits in the first quarter for corporates--non-financial companies--actually decreased. And if you include the financial and the banking sector, then these 200 companies reported profit increase of about 4% only. Since the profits are not growing, then the corporate tax collections will not be as high. Yes, of course, it is a risk. How the economy does is always a risk, but we expect it to meet the guidance of 10.5%. We are really confident that we will meet the revenue targets that have been set.

Q. The Budget announced a new Vivad Se Vishwas Scheme. How will it be different from the previous one? When will this be operational?

A. It is quite similar. The difference is that search cases are not included, they will not be eligible for a settlement under the scheme. Tax amount has to be paid, interest, penalty and prosecution are waived. Appeal has to be pending as of Jul 22. The application has to be made by Dec 31. If it is made after Dec 31 till a date yet to be notified, then 110% of the tax is to be paid. For cases which were covered in the earlier edition of this scheme, the amount to be paid is 110% of the tax till Dec 31 and 120?ter Dec 31. The scheme is operational, we will now be making the portal available for people to make applications. So, in that sense, we have not yet opened it up.

Edited by Akul Nishant Akhoury

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