Shoring up tax revenue from Covid-related items

On the eve of the fourth anniversary of GST in India, there are clear signs that the issues between the Central and state governments have only increased. However, what is perhaps more worrying is that cracks are beginning to show in the GST Council and dissent amongst its constituents is growing louder.

After the latest Council meeting, the West Bengal finance minister expressed his dissent at being silenced when he wanted to express his views. His equivalent in Punjab also expressed his objection to a few decisions of the Council. The Tamil Nadu finance minister had a few things to say to the representative of Goa after the previous meeting of the Council. The former finance minister of Kerala who had an active role to play when he was in the Council has called for reforms in it.

The reforms he called for included establishing a dispute resolution where there are differences of opinion and establishment of an independent secretariat that could meet more frequently and recommend decisions on routine matters. These suggestions appear to be practical since on some occasions, the GST Council appears to be traversing a path on its own without considering others. For instance, the Group of Ministers formed to suggest GST rates for Covid-related items for individuals was comprised only of members from the ruling party.

It is critical for the GST Council to step in now, listen to what the dissenters have to say and take a balanced decision. They should ensure that a mechanism is in place which ensures that the decisions taken on GST are not made only by elected representatives— the secretariat mentioned above can be staffed with non-political members too. The Council has been touted as a shining example of the spirit of cooperative federalism. If the schism between the Centre and the states widens, it could well be a case of uncooperative feudalism. The issue of compensation to the state governments is going to take some solving and lots of negotiations.

On hindsight, the forecast of revenue growth rate of 14% when GST was introduced, was over-optimistic. Covid-19 has ensured that 14% would remain a forecast that is not going to be achieved. State governments should ensure that they consider the revised proposal that the Centre would eventually propose without rejecting it only because they want to reject it. They should also resist the temptation to levy some sort of local taxes to balance their cash flows.

The need to exempt Covid-related equipment and medicines from GST should have been a no-brainer considering the impact that the pandemic has had on normal life. It should also be borne in mind that the GST Council did not cut GST rates due to the impact of Covid - the concessions were largely limited to filing of returns. The Council had to meet twice to decide on the issue of the rate of tax on Covid-related items. In the first meeting, it was decided to constitute a Group of Ministers (GoM) to deliberate on the issue and give their recommendations. The GoM turned out to be ministers from the same party.

Cherry-picking

In the second meeting, the GST Council announced that 18 Covid-related items would get GST concessions and not exemptions. The pattern of the recommendations is what we have come to see for about four years now when it comes to GST rates— an elaborate exercise in cherry-picking. Tocilizumab has managed to get an exemption but Remdesivir misses out— it is taxed at 5%. Oxygen, oxygen generation equipment, related medical devices and testing kits and machines will now be taxed at 5% instead of 12%.

It would appear that 5% was fixed only because it was the next lowest slab. One wonders what would have been the recommendation of the Council if the 5% slab was not there and the next lowest slab was Nil. If we were to hazard a guess, they would have probably created a new rate (as was done for diamond). Exempt and Nil-rated never showed up as options. Pulse oximeters, hand sanitisers, temperature check equipment and furnaces for crematorium have all been bracketed in the 5% slab.

The rate of tax on ambulances comes down from 28% to 12%. As has been the trend with all Covid-related concessions, a sunset date is fixed for the reduced rates - the above rates would be applicable till September 30, 2021. The previous notification had fixed the sunset date as August 31, 2021. The only explanation one can have for the new date is that the first meeting took place in May and the second meeting took place in June (though there was only a gap of about 10 days between the two meetings).

Considering the fact that Covid and its variants will be with us for some time to come, the GST Council would have done well to provide an omnibus exemption for all goods and services procured to neutralise the impact of Covid without a sunset date. Revenue may have been lost but the last thing on anyone’s mind during a pandemic should be shoring up tax revenues. Had the Council taken this stance, they would not have opted to tax installation of crematoriums at 5%.

The last four years have been a roller-coaster journey for everyone involved with GST. There is much that can still be done to simplify the rules and regulations - all that is needed is political will and administrative efficiency. There is a disconnect between what the GST Council proposes and how Central Board of Indirect Taxes and Customs disposes the proposal. This disconnect needs to be bridged at the earliest. However, going by what we have seen till date, it would appear that status quo ante would prevail— laws would be amended in bits and pieces with needless complications. GST taxpayers and consultants would continue to recall the opening line of a famous Tamil song “Why this kolaveri di?”

(The writer is a Bengaluru-based tax expert)