GST 2.0: A reform that has gone much deeper than expected

Going by reports, the discussions were full-throated and the endorsement unanimous. The council deserves plaudits for not dithering in blessing such a comprehensive reform agenda with far-reaching effects, despite concerns about a likely ‘loss’ of revenue. Looked at closely, the agenda reflects the work of not one, but three GoMs, the other two being on the compensation cess and on life as well as health insurance.

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This decision has been hailed by stakeholders and commentators with equal enthusiasm for good reason. At the outset, the relief offered by way of rate cuts is deeper and much more extensive than expected. The exercise has not been confined to the mere abolition of two rate slabs—12% and 28%—and the re-slotting of those goods and services in the 5% or 18% slabs. Goods and services have also been shifted from the 18% slab to 5% where necessary.

In the realm of indirect taxes, changing the categorization of individual goods or services from one rate slab to another is usually frowned upon as arbitrary. This is far from it. What has been attempted in this instance has three very clear policy underpinnings.

The most important one is the revision’s broad-banding of rates on substitute or similar goods, or goods of the same class, so that classification disputes are minimized. A case in point is food products, where several such disputes had arisen in the past owing to rate arbitrage. Now, all processed foods (barring aerated waters), including an omnibus category of foods not specified elsewhere, are clubbed at a common rate of 5%, setting at rest the scope for any future controversy.

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The second imperative that has driven this rejig is the removal of inverted tax rates. By moving specified goods from the 18% to 5% slab, long-standing inversions have been fixed for man-made textiles, tractors and fertilizers, apart from leather footwear and other products. Unless we transition to a single rate structure, some rate inversions are inevitable.

The package proposes a revamp of the refund process, so that 90% of the refund of accumulated input tax credit (ITC) due (on account of rate inversions) may be refunded in an automated and time-bound manner, subject to risk-assessment. This would unlock working capital and improve the competitiveness of industry.

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The third consideration that has informed such shifts is the clustering of products by their end-use to provide tax relief to certain sectors or items of mass consumption. Examples of these are tractors, agricultural machinery, fertilizers and bio-fertilizers, educational materials, personal care and personal healthcare products, ready-made garments and footwear (up to a certain value threshold) and renewables, including electric vehicles. Similar is the case with the review of items being charged 28%.

Goods that can be categorized as ‘aspirational’—like small cars, air conditioners, dishwashers and large TVs—have all been clubbed at a common rate of 18%. Barring full exemption for a few goods, the rate cuts are deep, with burdens going down in a range from 36% to 72%.

Thus, the relief for consumers is substantial and very likely to stimulate both aggregate demand and growth in the short to medium term. That is why Prime Minister Narendra Modi described it as a Diwali bonanza and its capacity to boost consumption has become its unique selling point.

This meticulous attention to detail in calibrating GST rates with clear objectives and a broad purpose is perhaps unprecedented. The spin-off is that the resultant structure automatically acquires durability and would not need to be tinkered with for a while.

Among the three pillars of the Prime Minister’s package, the structural pillar referred to the need to impart stability. This has been achieved. As such, a second-order effect of these changes would be the boost they provide private investments, which are motivated to a large extent by certainty and stability.

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It is heartening that the list of “demerit goods" or “sin goods" has been confined to tobacco and tobacco products, aerated beverages (given their high sugar content and attendant health risks) and some categories of automobiles (that have the ability to bear a higher incidence of tax). The council has also abjured the temptation of retaining the tax burden on these products at the current level (inclusive of cess) and confined them to the statutorily prescribed 40% rate. Since the rates are ad valorem, evasion-prone tobacco and tobacco products will attract tax on their retail sale price instead of today’s compounded levy. This is a neat and foolproof approach that takes minimal regulatory oversight.

With these changes and process reforms for registration, refunds and return filing, a major portion of our reform objectives has been accomplished. Some legislation-related issues, such as those related to ‘intermediary services,’ have also been resolved. The council’s attention should shift next to other legislative ambiguities, cleaning up the plumbing for ITC flows, introducing joint or coordinated audits and investing in the training of officers for dispute settlement—best done in mission mode.

These are the author’s personal views.

The author is former chairman, Central Board of Indirect Taxes and Customs, and senior advisor, KPMG and NCAER.