GST Council meeting: An opportunity to bridge trust deficit missed

The much-delayed 43rd GST Council meeting finally happened last week. Coming as it did in the backdrop of a horrific rise in Covid infections and deaths, a shortage of medical essentials, stretched medical infrastructure, complete or partial lockdowns in nearly 60% of the country— all of which had a debilitating impact on the economy— there was a lot riding on the outcome of this meeting.

There was a consistent demand from the states to exempt all Covid-related equipment and medicines from customs and IGST as a possible measure towards effectively combating the pandemic. The demands came from across the political spectrum but was more vehemently voiced by the opposition-ruled states, making what was a fairly reasonable ask, a political issue.

Finance Minister Nirmala Sitharaman, reacting a few days before the meeting through a series of tweets, listed out the items already exempted from both basic customs duty and IGST, all of which incidentally were subject to conditions, and sought to elaborate that exemption was a bad idea since the taxes paid on inputs would stick to the final product and increase costs.

Also read: GST Council tinkers while Indian economy burns

The FM also highlighted the fact that out every Rs 100 collected, the states’ share was Rs 70.50. Newspaper reports also suggested that the Fitment Committees, which consist of officers drawn from the Centre and states, had also not recommended any exemption. So, it was evident that the GST Council meeting would be a contentious affair.

The May 28 Council meeting 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. Exemption would thus be from both basic customs duty and IGST till August 31, extended from the present June 30. This, in effect, means a relaxation of the condition and an extension of three months from the present position. A new drug for the treatment of Black Fungus has been added to this list.

As regards 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 has been tasked to submit its report by June 8; 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 are not good in a value-added taxation scheme. They militate against the concept of VAT. But given the sheer number of exemptions which dot the CGST and IGST tariff, this is not a convincing argument especially at the present time. There were requests by some states for zero rating. This is not a good idea since the law as it stands now does not permit it, and it would require a major amendment. The decision to constitute a GoM to examine extending exemption to other individual items would mean an anxious wait for many. The need is now, and it would have cost the government very little in terms of revenue but would have been a huge step forward in regaining the trust of the states.

The Finance Secretary, while explaining why exemptions were not considered, raised the issue that such exemptions would not reach the intended recipient since in the hands of a private hospital, they will still be charged to patients. 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 lacking in ‘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. These 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 and the shipping industry.

The one real positive was the forthright mention in the press conference (not mentioned in the press release, strangely) 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 a right time.

All in all, an opportunity was missed to address several concerns, and more importantly to reduce 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.

(The writer is former chairman, Central Board of Indirect Taxes & Customs)