After the GST cut

Council should address structural shortfall in revenue

In a single-agenda meeting on Saturday, the Goods and Services Tax (GST) Council decided to reduce GST on a range of Covid-related items. Based on suggestions made by a group of ministers, the Council reduced GST on drugs such as Tocilizumab and Amphotericin B from 5 per cent to nil. GST on Remdesivir has been lowered from 12 per cent to 5 per cent. Medical-grade oxygen, ventilators, and Covid testing kits too will be taxed at 5 per cent. Further, GST on ambulances has been reduced to 12 per cent compared to the existing rate of 28 per cent. But the Council decided not to touch Covid vaccines. This is not surprising because the Central government will be buying 75 per cent of the production and distributing it free of cost to states.

The Council has done well to lower GST on Covid-related items as was demanded by various stakeholders, though the relief has come a bit late in the day. India went for one of the most stringent lockdowns in March 2020 — more timely relief would have perhaps helped augment medical capacity. Also, the tax relief is only till September. There is no evidence to suggest that the pandemic will be over by then. Even if the Council was of the view that the relief should be temporary, it could have been extended at least till the end of this year.

Finally, most citizens exposed to the virus suffered primarily because of shortages. Social media, for instance, was flooded in April-May with distress messages asking for anything from oxygen support to ICU beds to Remdesivir. It was also evident that some people were hoarding and selling essential supplies at large premiums — an inevitable result of the shortage. This was essentially a consequence of India’s unpreparedness. The government should not make the same mistake again and must build medical capacity to deal with a potential third wave. The reduction in GST should thus only be seen as a small step towards improving overall preparedness. The government should also consistently work to increase the pace of vaccination.

Interestingly, Covid-related discussion in the Council also raised another issue. Tamil Nadu Finance Minister Palanivel Thiaga Rajan questioned equal representation for all states in the Council. Smaller states seem to have objected to the idea of reducing rates on Covid items. To be fair, apart from some odd differences, the system has worked well and was constructed with the participation of all political parties. Any idea of proportional representation in the Council — either on the basis of population or tax collection — will have its own set of distortions. Therefore, instead of going back and debating the basic structure of the GST system, which has been settled by consensus, the Council would do well to address the most pressing issue of revenue shortfall. Although collection has improved in recent months because of better compliance, it may not be enough. Premature reduction in rates — mostly for political reasons — has resulted in lower revenue generation. The underperformance of GST is one of the reasons for increasing dependence on taxes from petroleum products. Lower revenue collection has increased government borrowing and can weaken the post-pandemic economic recovery. Since the Council is done with Covid items, it should now focus on the structural shortfall in revenue collection.