Key decisions ahead for GST Council: Rate cuts, slabs, compensation cess

The challenge will be to rationalise rates and adjust the part which is now collected as cess in a manner that makes the GST system more efficient and helps improve overall tax collection

The 54th meeting of the Goods and Services Tax (GST) Council took several important decisions, while it was noted that some critical issues will be reviewed by various groups of ministers (GoMs) from states. Among the key decisions by the Council was to exempt the import of services by foreign airlines from related parties based outside the country when such transitions are made without consideration. This will help a number of foreign airlines that were served tax notices. The Council also recommended business-to-consumer e-invoicing on a pilot basis. This comes after the successful implementation of the business-to-business e-invoicing. The Council expects it to bring more efficiency into the system, which should also help improve tax collection over time. Besides, the Council lowered GST on some cancer drugs.

Some critical decisions the Council will have to take in the coming months will be studied by different GoMs and the final call is likely to be taken after reviewing the recommendations. One of them is GST on insurance. There have been demands to review the tax levied on health-insurance products. It was stated on Monday that a GoM will look into the issue holistically and include both life and medical insurance. According to one estimate, insurance penetration in India was about 3.8 per cent compared to the global number of 6.5 per cent in 2023-24. Reduction in the GST rate will obviously make it more affordable and help increase penetration. However, the GoM and the Council must also look at the revenue considerations. A rate reduction could encourage similar demands in other services.

The second issue that is being looked at is rate and slab rationalisation. It was clarified on Monday that the concerned GoM had not arrived at any conclusion as reported in the media. The issue is extremely important. As has been highlighted in this space in the past, the GST system has underperformed because of premature rate reduction and total collection, including the compensation cess, as a percentage of gross domestic product is now roughly the same as collection in the pre-GST system from the taxes subsumed in the GST system. It must be noted that the cess is being collected to repay the debt incurred during the pandemic to compensate states and is not going to either the Centre or states. Thus, to improve tax collection, which will help the government at both levels, the rate and slab rationalisation needs to be undertaken in a manner that takes the overall rate to the revenue-neutral level.

Notably, a GoM will also look at the future of the compensation cess. Technically, the cess is now being collected only to repay the debt incurred during the pandemic and once it’s fully paid, which is likely to be before the projected date of March 2026, the Council needs to decide the way forward. There are suggestions that the cess should be subsumed into the basic tax structure. Permanent high rates of taxation could affect certain sectors. For instance, taxing a certain variety of cars at nearly 50 per cent may be difficult to justify. It may also add more slabs, which could further complicate the system. The challenge, therefore, will be to rationalise rates and adjust the part which is now collected as cess in a manner that makes the GST system more efficient and helps improve overall tax collection.