File image of Finance Minister Nirmala Sitharaman and Minister of State for Finance Anurag Thakur at GST Council Meeting (Image: Finance Ministry Twitter handle)
Four years since its introduction, the nationwide Goods and Service Tax is seen as a game changer. Where once there were multiple markets within the country and multiple submissions across states, with each state charging different rates for different items, there is now much more uniformity and policy stability.
A majority of goods and services are now under five slabs, the number of submissions, forms and clearances have reduced drastically, and over the past four years, the GST Council and officials have worked to improve the GST infrastructure.
However, there are still many pending issues, which analysts say that the GST authorities, including the Council, need to focus on. These include bringing items which are still outside the GST regime – like real estate and petroleum product – under the purview of GST, sorting out the issue of compensation to states, and providing stability in assessment and disputes.
Experts say that bringing petroleum products and real estate under GST should be a top priority for the council.
“From an industry point of view, it is very important to bring these sectors under GST. The entire brunt of these sectors not being under GST is faced by customers and the companies involved in these sectors,” said Abhishek Jain, Tax Partner at EY India. Jain said that companies in the real estate and oil industry have to comply with two regimes: GST and value-added tax, which are ultimately passed onto the customers.
Centre, states dependant on excise duties
When the GST was introduced in July 2017, policymakers including the late finance minister Arun Jaitley had predicted that once the GST regime was stabilised in 2-3 years, they expected the pending items to come under GST after discussions in the council.
The two-year anniversary of GST coincided with the pre-pandemic slowdown in 2019-20 and by the time GST completed three years, the country was in the middle of COVID-19.
Faced with revenue crunch from other sources, the Centre and states have increasingly come to depend on excise duties from petrol and diesel to shore up collections.
“The reluctance of the GST Council to discuss the matter is because around 30 percent of states’ revenues comes from excise duties on petroleum products,” Jain said.
With global commodity prices rising and the Centre and states not keen to cut duties, the high petrol and diesel prices have added to inflationary pressures for MSMEs and households.
Data from the government’s Petroleum Planning and Analysis Cell (PPAC) shows that contribution to the state exchequer in the form of sales tax and value-added tax of petroleum, oil, and lubricants has increased by 46 percent from Rs 1.37 lakh crore in 2014-15 to Rs 2 lakh crore in 2019-20. For the first nine months of 2020-21, it was seen at Rs 1.36 lakh crore.
The states that have seen the maximum revenue out of this in the first nine months of 2020-21 include Maharashtra (Rs 16,962 crore), Uttar Pradesh (Rs 14,643 crore), Tamil Nadu (Rs 11,826 crore) and Rajasthan (Rs 11,071 crore).
There is a concern among policymakers is that once discussions begin in the GST Council, states may seek separate compensation for revenue foregone from bringing petroleum products under GST.
Further Policy Stability needed
Analysts do say that there needs to be more clarity on GST disputes or contentious tax positions.
“Year number five (after GST) will be the year of GST audits for companies. That is what companies are mindful of. There needs to be more clarity on whether business process outsourcing companies are exporters or intermediaries. That remains a contentious issue,” said Mahesh Jaising, Partner at Deloitte India.
While the 37th GST Council meeting in late 2019 gave clarity on the issue of intermediaries, that decision has not yet been notified two years later, Jaising said as a matter of example.
Analysts also agree that the Council needs to find a solution to the issue of compensation being extended due to GST revenue shortfall. EY’s Jain said that there needs to be clarity on the matter because whatever decision is taken will have a direct impact on the states’ spending on welfare schemes and infrastructure projects.