To Improve GST Revenue, States Suggest Removing Exemptions, Hiking Compensation Cess

To improve goods and services tax revenue, states have made suggestions to the Centre ranging from removing exemption offered on various products and services to increasing compensation cess on luxury items, according to two government officials.

In suggestions to GST Council Secretariat, state GST officials have recommended increasing tax on items that are currently exempted from or attract “nil” GST, the first official cited earlier told BloombergQuint on the condition of anonymity.

Many food items like cereals, fruits and vegetables, among others, attract nil GST at present.

That comes after the Centre had written to states seeking their views on increasing collections from GST at a time when compensation to states has increased “significantly”. The Centre is yet to disburse its bi-monthly compensation to states for August-September—which is done during the first five years of the implementation of the indirect tax.

The compensation has been delayed on the back of inadequate collections through compensation cess—which is levied on sin or luxury goods—and used by the Centre to compensate states.

States have suggested removing the price-based threshold—levying different GST based on price of goods or service—that’s prevalent in the existing GST structure. GST on hotel accommodation is 18 percent if the tariff is above Rs 7,500; 12 percent if the tariff is between Rs 1,001 and Rs 7,500; and nil for tariffs below Rs 1,000. Similarly, movie tickets priced above Rs 100 attract 18 percent GST, while cheaper tickets are taxed at 12 percent.

Having a price-based threshold for levying GST creates difficulty for administration, the second official cited earlier said.

Any increase in GST rates should be backed by a thorough analysis of the pre-GST treatment, and with the idea to maintain a uniform rate considering the government’s revenue and industry’s concerns, Krishan Arora, partner at Grant Thornton, said.

Improving Compensation Cess Collections

A few states have suggested increasing the compensation cess on sin goods like cigarettes as well as levying a cess on items that are taxed at 18 percent, the first official cited earlier said. Compensation cess, at present, is levied only on products taxed at 28 percent.

Increasing compensation cess will help in solving the larger problem of delay in compensation to states, this official said. According to GST (Compensation to States) Act, 2017, compensation cess up to 15 percent can be levied on any other item on which the cess isn’t imposed currently.

The GST Council has the powers to levy compensation cess on items taxed at 18 percent to improve collections of the compensation cess fund, said L Badri Narayanan, partner at law firm Lakshmikumaran & Sridharan.

The Centre also has the powers to levy an additional cess solely to compensate states.

“The central government can impose an additional cess, along with the compensation cess, on any product until 2022, for the purpose of compensating states for losses they incur in first 5 years of GST’s implementation,” Narayanan said.

All these suggestions will be discussed at a meeting of state and central government officers to be held tomorrow. A final decision will be taken by the GST Council, in its meeting scheduled on Dec 18.

The proposal to increase GST rates and cess comes at a time when India is facing an economic slowdown, and consumers have cut spending. To boost consumption, the government is considering to reduce personal income tax, Finance Minister Nirmala Sitharaman said last week.

Doing Away With Exemptions

Some states have suggested doing away with exemptions offered on various services to some sectors on moral grounds like agriculture, education, among others, said a third government official on condition of anonymity. The reasoning is businesses that are small have been given relief—like exemption from GST—and can avail the composition scheme.

Businesses with annual turnover below Rs 40 lakh are exempt from GST, and firms with turnover up to Rs 1.5 crore can avail the composition scheme—that allows businesses to pay a flat GST based on their turnover.

Major relief is already being extended to small businesses, and there’s no need for a category or sector-wise exemption to businesses, in order to simplify the GST structure, the third official said.

Several services like those offered by educational institutes, accommodation at hotels with tariffs below Rs 1,000 per day and agricultural services have been exempt from GST.

Pruning of current exemptions should be done after careful consideration of the consumption base and importance for both goods and services to ensure that such exemptions aren’t misused, said Arora.

Some states have also recommended a “default” rate for services that aren’t mentioned in the GST tariff but leads to contention and litigation.