Next steps for GST Council

It should address issues with a longer-term view

The Goods and Services Tax (GST) Council is meeting physically for the first time in 20 months on Friday. While the council is likely to discuss a variety of issues, the fact that it is meeting physically indicates that things are getting back to normal after a severe disruption caused by the pandemic. Revenue collection in the current year is also likely to be better than the initial estimates as the second wave of the pandemic had a limited impact on economic activity. Although the risk of another surge in infection remains, the impact on economic activity and tax collection is likely to be limited. The increased pace of vaccination over the past several weeks would also help. With the improvement in the economic situation and an increase in overall tax collection in recent months, the council would do well to take a longer-term view on issues and focus on strengthening the GST system.

One of the subjects the council is likely to address is tax evasion by restaurants. It has been reported that online food-delivery firms could be asked to pay GST on the behalf of restaurants. The evasion is estimated to the extent of Rs 2,000 crore. However, asking food-delivery firms to pay the tax will address the issue only partially. It is safe to assume that a large part of revenue for restaurants comes from offline sales. Besides, this will complicate matters for both restaurants and food-delivery firms. Thus, instead of looking for shortcuts, the council must find ways to contain overall tax evasion in the sector. Another subject the council is likely to discuss is coconut oil. The fitment panel has suggested that containers with less than 1,000 ml of coconut oil can be classified as hair oil, attracting 18 per cent GST, while oil in bigger containers could be treated as edible, attracting a tax of 5 per cent.
 

This is a perfect example of how too many rates have induced complications and distortions in the GST system. Therefore, instead of tinkering with individual items, the council should focus on rationalising rates with the longer-term objective of creating a simple and robust GST system. It should reduce the number of slabs and take the average tax rate to the revenue-neutral level. The GST system has suffered because of premature reduction in rates, which has clearly exacerbated fiscal problems. Further, the council is expected to take a call on the National Anti-profiteering Authority as its tenure will end in November. The council would do well to let it end. It was a bad idea from the beginning and is certainly not needed after five years. The suggestion that its mandate be given to the Competition Commission of India or some other authority is absolutely unwarranted, and such a step must be avoided. There is no place for such an entity in a functioning market economy. 

The council is also reported to discuss the possibility of bringing petroleum products within the ambit of GST. This is certainly desirable as it would allow large users to claim credit and reduce cascading. However, it may not be feasible at this stage because of higher fuel taxes and fiscal compulsions. Yet, there is merit in the idea of exploring ways to bring petroleum products within the ambit of GST in the medium term without complicating or distorting the structure.