Time to bring fuel, alcohol under GST ambit

The Goods and Services Tax (GST) is finally set for a major overhaul. It has taken eight years for some much-needed reform of a levy that was intended to stimulate economic growth.

It was conceived as a single point tax to replace the numerous central and state cesses that had made taxation so onerous in India. Instead, it became multi-layered, and reform has been difficult due to states’ concerns over reduced revenue inflows. In its current format, the GST has different avatars for inter-state and intra-state goods along with four separate tax slabs.

Over the years, the GST council, comprising representatives of all states, has made many changes, seeking to ease the complexities. Yet it has remained bogged down by the original bulky structure.

This includes the four types of GST: integrated GST, which is imposed on inter-state supplies of goods and services, as well as central, state, and union territory GST, which are imposed on intra-state supplies. In addition, there are currently four tax slabs: five, 12, 18, and 28 per cent.

The proposed reforms, described as a Diwali gift to the nation by Prime Minister Narendra Modi on Independence Day, will be to compress the four slabs into two, retaining the five and 18% rates. In addition, there will be a small list of luxury or supposedly ‘sin’ goods to be taxed at 40%. This will simplify the system to a large extent.

There will also be an end to the complications of taxing some sectors, like automobiles. The current cumbersome system of a 28 per cent slab, along with a compensation cess of one to 22 per cent will be done away with, and automobiles will come under a single slab.

In fact, it has been the puzzling intricacies of rates in the GST structure that have made life difficult for trade and industry. Instead of easing the process of doing business, the tax provided endless possibilities for the bureaucracy to tie industries in knots with red tape. The infamous popcorn case sparked a million memes and even merited a comment in the Wall Street Journal. Popcorn was taxed differently, with caramel or salt or when sold loose or packaged. One businessman even earned the ire of Finance Minister Nirmala Sitharaman for describing the bewildering tax rates on the humble cream bun.

To add to the complexity is a compensation cess meant to cushion states for their perceived loss of revenues. Under the new system, the cess is proposed to be eliminated by next year.

The reform and simplification of GST will, thus, come as a huge relief to trade and industry, especially small businesses. The question is whether the implementation of this system will be streamlined to avoid hardship to users. The drive to prevent fraud has led to widespread complaints of unnecessary harassment. The new plan is to have technology-driven registration for small businesses and start-ups, along with automated processing of refunds. Effectively implementing the plan is critical to easing the process of doing business.

As far as the public is concerned, the GST reform should translate into lower prices for a wide range of essential goods as well as consumer durables and electronics. Indirect taxes are a levy on rich and poor alike, unlike direct taxes, which are collected from a small percentage of the population. It is, thus, desirable for them to be simplified as well as reduced, especially in the category of mass consumption goods.

Yet, the proposed overhaul is silent on one key area: the exclusion of petroleum products and alcohol from the ambit of GST. These areas were kept out originally due to states’ worries over loss of revenues. In some states, petroleum products and alcohol account for 14-17% of revenue collections.

These need to be brought into the GST fold, however, as it disrupts the seamless system of input tax credit (ITC). The ITC lets enterprises reduce tax liability by claiming credits on GST paid for business-related purchases. This is not available on either petroleum products or alcohol right now.

Since the government is describing this as next-generation reforms in GST, it needs to take the final step of bringing these two huge segments into the system. It can be done in a phased way by bringing products like diesel and petrol into the GST ambit initially and then moving on to alcohol.

The fear of revenue loss should have abated by now as GST collections have risen consistently over the past eight years. The pattern is likely to be repeated in the case of petroleum products and alcohol. In any case, it is time for the Centre and states to bite the bullet and reform GST fully rather than in a piecemeal way.

(Sushma Ramachandran is a senior journalist.)