43rd meeting of the GST Council: successes and failures
The long-awaited and delayed 43rd GST Council meeting is finally over. Against the backdrop of a horrific increase in COVID infections and deaths, a shortage of essential medical supplies, stretched medical infrastructure, which has had a debilitating impact on the economy, there were many waiting on the outcome of this meeting.
There was a constant demand from states to exempt all COVID-related equipment and drugs as a possible measure to effectively combat the pandemic. The demands came from all political backgrounds – but voiced more vehemently by opposition-led states, making what was a fairly reasonable demand a political question. The FM reacting a few days before the meeting, through a series of 16 tweets (to exceed the limit of 280 characters) listed the items already exempt from both the basic customs duty and the IGST, which were incidentally all subject to conditions, and further clarifying that the exemption was a bad idea as taxes paid on inputs would stay true to the end product and increase costs.
The FM also pointed out that out of every Rs 100 collected, the state’s share was Rs. 70.50. Newspaper articles also suggested that the planning committees, which are made up of central and state officers, had not recommended such an exemption either. It was therefore obvious that the meeting of the GST council which would take place in a disastrous context would be a contentious matter.
The May 28 Council meeting recommended that the IGST exemption on a multitude of products such as medical oxygen, oxygen concentrators and other oxygen and transport equipment and COVID vaccines be extended even if they are imported on a payment basis (compared to the previous condition that the import should be free) to donate to the government. The exemption would therefore be both from the basic customs duty and from the IGST until 31.8.21, extended from the current 30 June. This actually means a relaxation of the condition and a 3 month extension of the current situation. A new drug for the treatment of black fungus has been added to this list.
Regarding the issue of extending exemption points, the Council decided to constitute a group of ministers “to immediately consider the need for further relief of individual points related to COVID-19”. The GOM is to be headed by the Chief Minister of Meghalaya, a Wharton graduate, but it might have been more appropriate for a minister from a larger state like Karnataka or Gujarat to have been tasked with leading this committee. . The GOM must submit its report before 08.06.2021. Its recommendations would require the approval of the GST Council for the central government to then issue the necessary notifications.
The argument that the exemption adds to costs since taxes paid on inputs stick to final products is valid. There is no reluctance to deny the fact that exemptions in a value-added tax regime are never good. They are campaigning against the concept of VAT. But given the large number of exemptions that dot the CGST and IGST tariffs, that’s not a convincing argument, especially at the present time. Some states have asked for a zero rate, which means in simple terms that the entire supply value chain is exempt from tax. In its current form, the law allows the zero rate in very limited specific situations and would require a major amendment. The decision to form a GOM to consider 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 have been a huge step forward in regaining the confidence of states.
During the press conference, the finance secretary, while explaining why the exemptions were not being considered, raised the question that the benefit of such exemptions would not reach the intended recipient since in the hands of a private hospital, the patient would be billed. Here, too, state governments are endowed with the powers conferred by the Disaster Management Act to enforce discipline in the private hospital space. They might have been properly advised to do so. These gestures would have been modest but would have had a huge impact. It was a missed opportunity to build bridges with the United States. So, very soon after the Council meeting, we saw some opposition ministers accusing the central government of lack of “compassion”.
“ Compassion ”, as mentioned by one commentator, has been shown in extending filing deadlines, to small taxpayers (under Rs 5 crore), in capping late fees for returns pending, and a beneficial exemption for the larger taxpayer. This would reduce the burden of compliance. Some other simplification measures were also recommended by the Council such as also the reduction / exemption from liability on the provision of certain services – services provided to an educational institution, for the conduct of examinations by the National Council of ‘review, extension of maintenance, repair, operating facility (MRO) available for the aviation sector for the shipping industry as well.
The only bright spot was the direct mention at the press conference (oddly not mentioned in the press release) that the central government would maintain its commitment to close the GST compensation gap. It is one bone of contention less. The shortfall in compensation has been estimated at around Rs 1.58 lakh crore – the amount which depends on revenue collection in 2021-2022. The FM also mentioned that a special Council meeting would be called to discuss the issue of extending the 5-year limit for compensation. It is also a welcome step. And if a consensus emerges for an extension of the clearing deadlines, the opportunity should also be used to consider whether the very high rate of 14% to calculate the compensation should continue. States should be persuaded to accept a more realistic 10-12%. There would be an argument that, given the current fiscal situation, it might not be the right time – but it’s a question they can never be the right time for.
Overall, an opportunity was missed to address several concerns – and most importantly to reduce the trust deficit. The TPS Council is too important an institution to be reduced to political football. While this is “not the end of the road for India’s GST” as some political commentators have asserted, the fact remains that the Council needs to be carefully fed – and the ball is firmly in it. Center camp.
—Najib Shah is retd. President of the Central Council of Indirect Taxes and Customs. Opinions are personal.
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