43rd GST Council meet: Hits and misses

The Council meeting on May 28 has recommended that IGST exemption on a host of commodities such as medical oxygen, oxygen concentrators and other oxygen and transportation equipment and COVID vaccines be extended even if imported on payment basis (as against the previous condition that the import should be free of cost) for donating to the government. The exemption would thus be from both basic Customs duty and IGST till 31.8.21, extended from the present 30th June. This, in effect, means a relaxation of the condition and an extension of 3 months from the present position. A new drug for the treatment of Black Fungus has been added to this list.

Regarding the issue of extending the items for exemption, the Council decided to constitute a Group of Ministers ‘to go into the need for further relief to COVID-19 related individual items immediately ‘. The GOM is to be headed by the Chief Minister of Meghalaya, a Wharton graduate, but perhaps it would have been more appropriate if a minister from a bigger state like Karnataka or Gujarat had been tasked to head this committee. The GOM is to submit its report by 08.06.2021. Its recommendations would need the endorsement of the GST Council for the Central Government to thereafter issue the necessary notifications.

The argument given that exemption adds to costs since the taxes paid on inputs sticks to the final products is valid. There is no gainsaying denying the fact that exemptions in a value-added taxation scheme are never good. They militate against the concept of a VAT. But given the sheer number of exemptions that dot the CGST and IGST tariff, this is not a convincing argument, especially in the present time. There were requests by some states for zero-rating, which in simple terms means the entire value chain of the supply is exempt from tax. The law as it stands today permits zero-rating in very limited specific situations and would require a major amendment. The decision to constitute a GOM to examine extending the exemption to other individual items would mean an anxious wait for many.

The need is now and would have cost the Government very little in terms of revenue but would been a huge step forward in regaining the trust of the States.

The Finance Secretary in the press conference while explaining why exemptions were not considered raised the issue that the benefit of such exemptions would not reach the intended recipient since in the hands of a private hospital the patient would be charged. Here too the State governments are equipped under the powers vested under the Disaster Management Act to enforce discipline in the private hospital space. They could have been suitably advised to do so. These gestures would have been small but would have had a huge impact. This was an opportunity missed in building bridges with the States. And so, very promptly after the Council meeting, we had the sight of some opposition ministers accusing the Central Government of lack of ‘compassion’.

‘Compassion’, as has been mentioned by one commentator, has been shown in extension of timelines for filing returns, to the small taxpayers (under Rs 5 crore), in the capping of late fee for pending returns, and some beneficial dispensation for the larger taxpayer. This would reduce compliance burdens. Some other simplification measures have also been recommended by the Council as also reduction of/exemption from, liability on supply of certain services -services supplied to an educational institution, for the conduct of examinations by the National Board of Examination, extension of maintenance, repair, operation (MRO) facility as available to the aviation sector to the shipping industry also.

The one real positive was the forthright mention in the press conference (not mentioned strangely in the press release though) that the Central Government would stand by its commitment to meet the GST compensation shortfall. This is one major bone of contention less. The compensation shortfall has been estimated to be around Rs.1.58 lakh crore- the amount dependent upon the revenue collection going forward in 2021-22. The FM also mentioned that a special Council meeting would be called to discuss the issue of extending the 5-year limit of compensation. This too is a welcome measure. And should a consensus emerge for an extension of the compensation timelines, the opportunity should also be used to examine if the very high 14% rate to calculate compensation should continue. The States should be persuaded to accept a more realistic 10-12%. There would be an argument that given the present fiscal position this may perhaps not be the right time -but this is an issue for which they can never be the right time.

All in all, an opportunity was missed to address several concerns-and more importantly in reducing the trust deficit. The GST Council is too important an institution to be reduced to a political football. While it is ‘not the end of the road for India’s GST ‘as some political commentators have claimed, the fact remains that the Council needs careful nurturing-and the ball is firmly in the Centre’s court.