GST Rate Cuts: Impact On Businesses And Government
The GST Council’s decisions are a win-win for the government, taxpayers and consumers, writes Jigar Doshi.
Despite murmurs of opposition by a few states, the 31st GST council meeting was remarkably successful in fulfilling the central government’s objective of cutting GST rates. Rates of more than 20 goods and several services have been reduced.
The decision was in line with the long-term objective of the government to slowly reduce the scope of the 28 percent category and merge the 18 percent and 12 percent categories into a single rate of 15 percent. Besides a reduction in rates, the government also provided several important clarifications to remove ambiguities in rates and set right the uncertainty caused by a few decisions of the state level Authority for Advance Rulings.
GST: The Many Course Corrections
Impact On Business
The top sectors benefitting from the rate cuts are consumer electronics (monitors and TVs, digital cameras, power banks, video games), food (frozen and branded vegetables, restaurants), renewable energy (solar power projects) and education. With seven goods removed from the 28 percent category, the only remaining items are luxury goods apart from automobile parts and cement which also may be dealt with once GST throws up the adequate revenue buoyancy.
Reducing GST on vegetables (frozen, branded, cooked, uncooked or in preserved form) from 5 percent to nil Is a welcome move for consumers and the restaurant industry which is ineligible for input tax credit (ITC) on inputs. This rationalisation in GST rates will positively impact the bottom line of restaurants and induce them to rationalise menu prices which will ultimately benefit consumers.
In the educational sector too, useful clarifications were issued to clarify the rates applicable on supply of food and drinks to students and faculty as below:
In a huge relief to the entertainment sector, and in response to their long standing demand, the GST rate on cinema tickets has been rationalised as follows:
On the restaurant front, in a recent advance ruling it was held that food items sold by a shopkeeper would be taxable at the rate of 5 percent if there is also a restaurant running in the same premises, as against the rate of 12 percent applicable on branded snacks and 18 percent on cakes and pastries. It has been clarified that nature of business establishment making supply of food, etc will not determine whether the supply is a supply of goods or services. It will rather depend on the constituents of each individual supply and whether the same satisfies the conditions/ingredients of a ‘composite supply’ or ‘mixed supply’. This clarification could heighten complexity as the GST rate would have to be determined on a case to case basis rather than a flat rate of 5 percent.
On the renewable energy front, decisions by various AARs had resulted in a situation wherein the entire EPC contract for setup of a solar power plant was taxable as a works contract service, at the rate of 18 percent. That led to the denial of the 5 percent concessional rate on solar power equipment. To provide relief to this sector and correct the anomaly, the GST council has provided for an artificial split between the goods and service portion of the contract as given below...
Thus, it can be seen that the government has targeted its actions towards providing relief in important sectors of mass consumption where the impact could be felt by the maximum number of people.
Impact On Central And State Governments
The government had targeted a minimum GST collection of Rs 1 lakh crore per month at the beginning of the financial year (Budget 2018-19). While a substantial part of the year has already gone by, only in April and October did the government manage to meet that target. Finance Minister Arun Jaitley said, after the GST Council meeting, that the reduced rates will have further hit tax revenue by Rs 5,500 crore (to be proportionately reduced for the 3 remaining months).
This being an election year, the government expenditure is already expected to be higher than normal and indisputably this move of the government to cut GST rates will result in further slippage of fiscal deficit targets for FY 2018-19.
As far as the states are concerned, it was reported for the very first time (contrary to populist logic) that certain states were in opposition to the reduction in rates, citing impact on revenue collections. This was also the first time where the convention of arriving at all decisions in the GST Council unanimously could have been shattered. However, the impact on the state governments is likely to be muted as the Centre is bound to provide full compensation to the states for five years considering annual revenue growth of 14 percent on the base year of FY 2015-16.
With the implementation of anti-evasion measures such as e-way bills, GST audits, the new compliance mechanism providing for system-determined input tax credits, it is expected that GST revenue collections would receive a boost in the year to come. The more buoyant the revenue collections, the more leeway available with the government to rationalise GST rates and reward honest taxpayers.
Overall, the decision of the GST Council can be seen as a win-win for the government, taxpayers and consumers.
Also Read: Arun Jaitley On 18 Months Of GST