States Suggest Three GST Rates, Law Tweaks To Shore Up Revenue

States have suggested reducing the number of goods and services tax slabs and tweaking the composition scheme to improve revenues from the indirect tax.

State government GST officers, in a discussion with central GST Officers, have demanded that the number of slabs be reduced from four to three, an official told BloombergQuint on the condition of anonymity. A few officers also suggested having a standard rate close to the 18 percent slab, and one rate below and above the standard rate.

One of the proposals is to also introduce a new tax slab of 8 percent below the standard rate. The 8 percent rate came up as part of the Centre’s proposal, which suggested a three-rate structure of 8 percent, 18 percent and 28 percent.

A group of officers is considering merging the 5 percent and 12 percent slabs into 8 percent, BloombergQuint had reported last month. Goods presently in the 5 percent slab could move to 8 percent and those in the 12 percent slab could be distributed between 8 percent and 18 percent slabs.

To be sure, the distribution of commodities will depend on discussions within the GST Council on how much additional GST revenue could be raised through this exercise. Presently, goods and services are taxed under four slabs of 5, 12, 18 and 28 percent under GST. Gold is taxed at 3 percent, while rough precious and semi-precious stones are taxed at 0.25 percent.

Among the 1,216 commodities that find common use:

• 183 are taxed at zero rate.
• 308 at 5 percent.
• 178 at 12 percent.
• 517 at 18 percent.

The rationalisation of rates would take time, and various proposals by state governments will be tabled before the GST Council for discussion on Dec. 18, the official cited earlier said.

Proposals to revamp the GST rate structure were discussed at a meeting of state and central government officials yesterday to explore ways to improve revenue at a time when the government is staring at a shortfall in budgeted revenues of the indirect tax.

There was also a suggestion to change the structure of GST by letting manufacturers pay GST on maximum retail price, akin to the practice in excise regime, the official said.

GST, according to this proposal, would have to be paid by the manufacturer only on the MRP of a product. That would mean other businesses in the supply chain, including distributors, wouldn’t get credit on services—like transportation and storage—they use to sell the product. If GST on MRP must be paid by all participants in the chain, then the credit they can avail would be still restricted to the quantum of tax paid on the product and not claim full credit on the tax paid. Then, the services availed by them will become a cost for distributors and retailers.

This isn’t the practice anywhere around the world where GST is implemented, a second official told BloombergQuint on the condition of anonymity, adding that this proposal is unlikely to go through.

MRP-based GST would be a significant deviation, as GST is levied at each leg of the transaction with the facility to avail input credit, said Abhishek Jain, a partner at EY India. “If MRP-based GST is to be paid at the first leg only by the manufacturer there may be a concern on input credits becoming a cost for distributors and retailers.”

Other proposals discussed at the meeting include increasing tax rates in the composition scheme—that requires taxpayers with turnover of up to Rs 1.5 crore to pay a flat GST rate based on their annual sales.

A review of the composition scheme will be undertaken to make the scheme more attractive, the second official said.

Some states have also demanded removal of exemptions on goods and services and the price-based threshold—levying different GST based on price of goods or service—that’s prevalent in the existing GST structure.

The Parliamentary Standing Committee on Finance, in a recent report had said that GST collections have slowed in recent months due to resetting of tax rates. The report said it expects the government to resolve all troubling issues at the earliest to achieve the desired revenue buoyancy and remain “vigilant” to prevent misuse of provisions such as input tax credit.