This week's GST Council meeting on November 3 and 4 is important as it's expected to arrive at a consensus on several critical issues namely rate structure, administrative control and the GST law itself.
Multiple rates of 6 per cent, 12 per cent, 18 per cent and 26 per cent seems to be structure around which consensus will emerge. While there are many that will be uncomfortable with multiple rate structure, the logic behind to ensure there is no impact on CPI inflation under GST basis existing weightage of items in the CPI baskets. This is understandably pragmatic, as long as there are no rate differential in the same class of goods.
In this potential rate structure what is critical is to maintain concept of standard rate at 18 per cent and the 26 per cent rate should only apply to de-merit goods. We must avoid the temptation of shifting more goods to 26 per cent category because that will defeat the objective of lowering of rates in a large category of goods under GST.
Another debate is the intention of the Centre to levy cess on de-merit goods in 26 per cent category outside the GST chain which will be non-creditable. The reason espoused for this cess is the need to compensate States in case of potential revenue shortfall. While some States have reacted to this cess it looks like consensus may emerge on this issue. This cess argument is surprising considering the expected improved compliance due to transaction level tracking in GST. Clarity is required as to how this cess will be levied and at what stage, it appears cess maybe different for different goods. It's important to ensure the effective GST plus cess on such de-merit goods should not exceed the current effective indirect taxes.
The issue around dual administration especially for service providers remains a contentious issue. In the run up to this week's council meeting States have again raised this issue basis the large number of service tax assesses. GST on services is a new regime for States and is best left to Centre to deal with for the first few years.
While there is so much focus around rate structure another very important agenda for the GST Council will be the GST Law. There are several aspects of the Model GST Law which require changes basis industry feedback. The critical areas are that of Valuation, Transition, and Centralised registration for services sector, treatment of free supplies / discounts and the borderless flow of goods within States under GST.
Valuation as per Model Law will be transaction value and provisions of Excise have been borrowed which could be onerous to comply and may turn the clock back for several sectors like FMCG, Retail Pharma etc. which today are under the MRP regime. The concept of invoice value maybe more appropriate under value added tax like GST.
Another aspect is the Model Law's proposed treatment of supplies without consideration inter-se registrations which impacts inter-company stock transfers and other free supplies prevalent in industry.
Transition provisions are equally critical to ensure no existing duties/ taxes become a cost on the inventory during transition. This will lead to a financial impact for the industry and affect goods supply during transition.
There are also several sector specific issues which need to be tweaked for ease of compliance. Centralised registration for the services sector is a very critical aspect, there have been several representations by various industry sectors like Telecom, Financial Services etc. on this aspect but the outcome is still unclear. Multiple registration will be death knell for these sectors from a compliance perspective, and many may not be in a situation to comply.
We hope the GST Council think through these critical issues and arrive at a consensus that is pragmatic, ensuring the objective of an efficient tax regime that provides a common market and eases compliance for all stakeholders under GST.
Guest Author
The author is National Leader, Indirect Tax, EY
