The Goods and Services Tax (GST) Council was told on Wednesday that the central government might have a compensation cess shortage of Rs 63,200 crore in the current financial year.
The calculation is from the Council's revenue augmentation panel, which also says this shortage could balloon to Rs 2 trillion by 2021-22. It has assumed revenue growth of five per cent this year; actual growth in April-November, the first eight months of the financial year, was 3.7 per cent.
In the best-case scenario presented by the panel, with a growth rate of 10 per cent, there will be a cess gap of Rs 96,360 crore in the coming financial year, 2020-21 and of Rs 1.36 trillion in 2021-22. And, it has ruled out the possibility of 10 per cent, or even eight per cent, revenue growth for the current year.
Nor, however, does the panel see any scope for raising the compensation cess rates. It says this will not yield ‘any significant revenue’ to meet that gap.
Instead, it has recommended that the present inverted duty structure be corrected, besides restructuring of GST rate slabs.
Punjab finance minister Manpreet Badal said the revenue picture so presented was a setback, being much worse than anticipated. State finance ministers will now have to comment on the presentation.
The panel has listed 24 items -- including mobile phones, footwear, fabrics, LED lights, medical equipment, utensils, agricultural machinery, pharmaceuticals and renewable components — that have an inverted duty structure. Resulting in refunds of close to Rs 20,000 crore annually.
For instance, the GST rate on mobile phones is 12 per cent; that on phone parts and batteries is 18 per cent. Resulting in an inverted structure which creates cases of unutilised input tax credit (ITC). A registered taxpayer can claim refunds on the ITC on account of a higher tax on inputs and lower tax on outputs. The cumulative effect of such a structure is resulting in huge input tax credit outgo. Apart from causing distortion and litigation.
Other recommendations from the panel for augmenting of revenue include a two-slab GST structure, of 10 and 20 per cent, as against the current four-slab one, though it also suggests a special higher rate for 'sin' and luxury goods. Also, rationalisation of the exempted items list and raising the composition rate for manufacturers from the current one per cent.
On plugging of leakages, it suggests an MRP (Maximum Retail Price)-based levy on items such as pharmaceuticals or goods sold to final consumers. It has listed suggestions on revenue augmentation from states and recommended moving items from the 5 per cent and 12 per cent lists to higher slabs, mobile phones being one example.
Some of the exempted items under GST currently are education, health, public transport, house rent, cereals, fruit, jaggery, honey, bread, salt, milk, printed books and kajal.
On broadening and rationalisation of GST rates, some of the suggestions it has compiled include raising the rate on precious metals from three per cent now to five per cent, taxing the higher segments of education and health, and revisiting the rates on some items that have been reduced from the earlier 28 per cent to 18 per cent.
M S Mani, partner at consultancy entity Deloitte India, observed that GST collections are also dependent on factors such as economic growth. Compensation cess, he adds, appear to be lower than the requirements of states.