Manish Sisodia, Amit Mitra, and Krishna Byre Gowda at the GST Council meeting, in New Delhi, on Dec, 22, 2018. (Photographer: Manvender Vashist/PTI)

The Two Issues That Will Test GST Council’s Ability To Forge Consensus


The recently concluded thirty-first Goods and Services Tax Council meeting delivered a series of rate reduction decisions on expected lines. The focus of the discussions before and after the meeting has centered around the 28 percent rate bracket. With economic and political perspectives around the highest rate slab, the GST Council rationalised fitment of several goods and services to lower rate slabs. This would be a welcome change to the business and public.

While the focus has been on reductions, also significant in this GST Council meeting were decisions that were not taken. Till date, decisions in the GST Council have been unanimous. That does not mean that there have not been significant differences between states on issues. The GST Council has used the technique of referring some of these decisions to a Group of Ministers to study and make recommendations to resolve these differences. The most recent meeting also threw up some problems that have been referred to to the GoM. Four issues have been referred to the GoM as of now. They are:

  1. Composition scheme for service providers;
  2. Tax rate on lotteries;
  3. Taxation of residential property;
  4. Threshold limit for exemption from GST;

There is an in-principle agreement among members on the first and the fourth points. The referral has been made in order to study and recommend the modalities and limits, based on data.

The second and the third issues are more challenging.

Also read: GST Rate Cuts: Impact On Businesses And Government

Tax Rate On Lotteries

Lotteries generate significant revenues for states that operate them. In the erstwhile regimes of service tax and sales tax, lottery was hard to tax. Both systems excluded actionable claims from their scope and hence lottery was not taxed. Some of the value addition was sought to be taxed as services provided by the distributor but with limited success. To overcome these issues, when GST was conceptualised, actionable claims in the form of betting, gambling and lottery were kept within the tax ambit by means of specific inclusions. Therefore, clearly lottery is taxable in GST.

One of the reasons lottery and other games were a heavily contested subject in the earlier regimes, was because a high rate of tax dissuades participation in a legal manner. Players do not stop playing altogether due to a high tax rate. Instead, they go underground, leading to other undesirable developments.

When GST was introduced, the industry expected that the applicable rates would be around 12-15 percent, in line with GST rates in other countries. Instead, India introduced a two-tier rate structure for lottery. For state-run lotteries, the rate of tax was 12 percent, while private lotteries attracted 28 percent.

A combination of this GST rate, the licence fee for running the lottery, and a high withholding rate under income tax, have effectively rendered private lotteries unviable.

The GoM has now been asked to see if private lottery rates require rationalisation. Ultimately, the result of such taxation structure is lower tax collections and results in an encouragement of non-compliance. It is expected that a decision on lotteries will also have an impact on taxation of games of similar nature.

Also read: GST: The Many Course Corrections

Taxation Of Residential Property

In his media briefing, Finance Minister Arun Jaitley gave some insight into the need for reviewing the policy on the real estate sector. He indicated that GST Council members were concerned about the influence GST was having on homebuyers’ experience. There are more layers to the concerns, that were not expressly stated. Real estate is a crucial area of the economy that needs revival. Since demonetisation, this is one sector that has remained lukewarm. At the same time, it continues to be a source for the generation and use of unaccounted money. Therefore, tackling issues relating to the taxation of residential property is critical for the GST Council.

Taxation of residential property is difficult. Sale of residential property involves three components – land, materials and construction services.

When the government seeks to tax the sale of residential property, it really seeks to tax the goods and services ingrained in the property. Land is outside GST and is not taxable. The government’s assumption was that since the rate for services—and most goods—was 18 percent, if a ‘discount’ for land could be made, an appropriate tax could be levied on the construction component of the sale. Accordingly, a 6 percent reduction was deemed sufficient to account for land and the rate fixed for such sale was kept at 12 percent. Input tax credit of goods and services was allowed fully and was expected to be subsumed within the value addition expected on such sales.

This model of taxation works well for modern cities such as Delhi and Mumbai but is challenging for smaller cities and towns.

While the construction cost does not vary significantly between construction done in small towns and big cities, the difference in land value is substantial. It was felt that unless the land contributed at least a third to the value of the sale, GST on inputs and input services would not be subsumed effectively. This led to a growing sense among homebuyers that while the prescribed rate was 12 percent, in effect the rate applied was 13-15 percent, leading to an increase in the cost of home purchase.

Several proposals have been shared with the GST Council to ‘solve’ this problem. But the solution to such a problem is not easy. A reduction in the rate below 12 percent would lead to higher credit overflow. An increase in rate would solve the credit problem but pinch homebuyers. Refund of excess credit has its own problems in a sector that still remains quite opaque. It is this problem that the GoM now has to solve before the next GST Council meeting.

Also read: Eighteen Months Of The GST  

Centralised Appellate Authority For Advance Ruling

Another decision of the GST Council during this meeting was the creation of a Centralised Appellate Authority for Advance Ruling to resolve conflicting positions between two or more state Appellate Advance Rulings. It is expected that this authority’s decision will bind states on a pan-India basis. At a policy level, this seems like a good decision to ensure uniformity between states. But, it has some drawbacks.

  • First, we now effectively have a three-tier advance ruling scheme with two levels of appeal. This means that the rulings will not be final for a long time, which will affect business decision-making.
  • Second, it continues to operate only with government officers. There’s a natural orientation to decide in favour of the government.
  • Third, if this authority starts deciding cases in a pattern that appears to favour the government, then the chances of state appellate authorities deciding borderline cases in favour of taxpayers is likely to diminish.
  • Finally, there is likely to be a debate on what constitutes ‘conflicting decision’. Will non-decisions on points raised constitute conflict? Will other issues which were part of the application for advance ruling—but on which there is no apparent conflict—also be considered? These and several other points may require clarification.

Therefore, while in theory, this is a welcome step, it would have been better to centralise all the appellate advance ruling authorities into one centralised appellate authority with individual states administering only the first level of rulings.


With all these issues, the GST Council still continues to impress in the uniformity of its functioning. Some of the issues that the GST Council is seeking to resolve are inherently difficult and there are no ready solutions. It is heartening to see the GST Council making an effort to address these issues in a mature and systematic manner. The GST experience will improve with procedural simplifications and rate rationalisation. One area that the GST Council needs to consider is the functioning of ‘independent’ authorities such as the advance ruling authority and the anti-profiteering authority and improve the experiences of these authorities to foster real business impetus in the GST environment.

L Badri Narayanan is a partner at law firm Lakshmikumaran & Sridharan.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.