Experts discuss GST Fitment Committee proposed rate slab rejig

The Goods and Services Tax (GST) Fitment Committee has proposed hiking the 5 percent tax slab to 7 percent, and the 18 percent slab to 20 percent. The feasibility of merging the 12 percent and 18 percent slabs to a single slab of 17 percent may be looked into, it said. The committee has also proposed that the 1 percent compensation rate be hiked to 1.5 percent, said sources to CNBC-TV18.

The Committee has also suggested hiking GST on precious metals -- gold and silver -- from 3 percent to 5 percent.

However, the Group of Ministers (GoM) have yet to deliberate on these proposed changes in rate slabs. The GST Council is likely to take this forward once the GoM takes a final view, which is likely on November 27. The GoM will submit this proposal after careful consideration to see that exemptions need to be phased out to avoid tax evasion. According to the GoM, the implementation of rationalised rates requires careful concentration. They also say that reduction of 28 percent to 18 percent cannot be commensurate with price reduction. Also, items of public consumption require careful consideration during the rationalisation exercise.

If the GoM concurs with what the Fitment Committee is saying, then they will send their report to the GST Council and the final decision will be taken by the GST Council.

To decode what the proposed changes could mean for businesses and the road ahead, CNBC-TV18 spoke to Najib Shah, former chairman, CBEC; MS Mani, Partner, Deloitte India; Abhishek Rastogi, Partner, Khaitan & Co, and Pratik Jain, Partner, Price Waterhouse & Co, LLP.

There have been many rate revisions, but the slabs have remained more or less intact,  though their falling under different slabs have changed significantly. Concerns have been raised by the Finance Commission, for instance, suggesting that the rates are not revenue-neutral any longer. So, when asked whether he believes that would have been the guiding principle for the Fitment Committee as it went about this exercise, Shah said, he did think so because the Finance Commission has indicated that the current weighted average of 11.6 percent is far too less from the revenue-neutral rate.

With regard to the suggestion and recommendation to hike the rate from 5 percent to 7 percent, he said, everyone's been discussing ad nauseam of putting in place three rates – merit rate, a standard rate and a demerit rate.

If the Fitment Committee has recommended hiking the rate from 5 percent to 7 percent, they may have their reasons, "but I don't know whether the GoM will go with those reasons, simply because it doesn't really look very politically expedient for them to increase this rate from 5 percent to 7 percent," said Shah.

“I am all for a merger of the 12 and the 18 percent slabs and bring it to anything between 16 and 17 percent. That would take care of a lot of the revenue considerations. Once that happens, the revenue-neutral rate, ideal of 15 percent to 17 percent or 16 percent will also be achieved largely,” said Shah, adding that he was also for hiking the rate on gold and silver from 3 percent to 5 percent because 3 percent is another special rate.

When asked if we are headed towards a more revenue-neutral rate, and whether the 5 percent becoming 7 percent, and 18 percent becoming 20 percent would achieve that, because the big bone of contention and the substantive change would have been the merger of the 12 percent and 18 percent, he said that proposal is yet to be examined and is not yet a recommendation from the Fitment Committee.

Jain said the revenue-neutral rate is something of a misnomer in many ways, because the revenue-neutral rate that was there a few years ago, and the one that's there now, could be different. GST collections have been increasing over the last six months, and in most of the months, more than Rs 1 lakh crore (has been coming in). And this has happened despite the rate reduction.

“I think, increasing the tax rate, whether it is 5 percent to 7 percent or 18 percent to 20 percent is an easier option, but perhaps not desirable. I think, that a lot of discussions will happen in the GoM. When we talk about rationalisation, we talk about merging 4 percent to 3 percent, there is 5 percent, 12 percent, 18 percent and 28 percent; (these) either become 6 percent, 17 percent, and 28 percent, or 7 percent, 16 percent and 28 percent. If we just increase the tax rate without merging the tax slabs, then that will perhaps not be in line with what the GoM has been constituted for,” said Jain.

Jain further said that  in the 5 percent category also there are a lot of items, such as edible oil, transportation, real estate and restaurant, and it will impact the common man. Even if the 12 percent and 18 percent rates are merged into 16 percent or 17 percent, there would still be a lot of items in the 12 percent category, such as food items like fruit juices, etc. So, would you would want to increase the tax rate on those or not, is a question.

“My take on this is that this is just the initial discussion happening in the GoM. Till now, the GoM has been focused on inverted duty structure to my mind, and these discussions have not come forth. It will take time to do the sectoral analysis, look at the products, etc., and its impact on inflation before you take a decision. But I would want to see a three-tiered structure and not necessarily the rate increase,” said Jain.

On some of the proposed changes, it is not necessarily desirable politically either for the GST Council to consider hiking rates at this point in time. So, when asked if he thought that there was political appetite at this point in time to consider anything of the sort even though that might be the recommendation, Mani said, "Undoubtedly, we should be having fewer rates and we should be looking at a rate-structure which has got 2 slabs or 3 slabs only. That is certainly the long-term or medium-term ambition, and there is no doubt on that and no two views on that."

Mani further said that when GST was introduced, the rates on virtually all products came down; there were a few where it went up, but largely they came down. "Subsequent to the introduction of GST, we have only seen the rates coming down, and in fact, many of the 20 percent products were brought down to 18 percent or so," he said.

“So, today, if we look at this in a slightly larger perspective, as we approach GST, which is entering the fifth year, and the GST in six months from now will be a five-year-old tax, is it the right time to take a relook at the rates; whether certain products are cross-subsidising certain other products? Would there be a business case for certain products which are, I would say, price inelastic as opposed to certain products which are price elastic? Possibly as we approach the fifth year of GST, which is not too long away, maybe this is the right time to look at the products, see how they are classified, see if certain rates should be changed, certain rates not be changed, etc,” said Mani, adding that one has to keep in mind that in GST, today, the rates that are there are common for goods and services. So, the 18 percent is applied for virtually most of the services, except very few of them, and it applied to a majority of the goods.

In respect of services, there is possibly a good case for reducing the rate from 18 percent to 15 percent, 16 percent or whatever, because that is one area where the rates really increased by 20 percent when GST was introduced. "But the moment we start changing the rate of services from the rate of goods, we are again going to rate complexity, and there would be an arbitrage between certain categories of books and certain categories of services. So, complexity and having the right rate will always pull in two different directions," said Mani.

“The more we have simplicity, the easier it becomes, the easier it is to administer,” said Mani.