GST Council, the federal indirect tax body, is set to make changes in tax rates of goods and services a yearly affair, moving away from frequent rate revisions to remove ‘uncertainty’ for businesses and the government, finance minister Nirmala Sitharaman said on Sunday.
Sitharaman said that frequent changes in GST rates have led to an inverted duty structure, where the raw materials ended up becoming costlier than the finished product, in some cases which also created problems with tax refunds.
“Therefore, when the rate of tax of one item is brought down, a whole lot of other ripple effects are created. With that ripple effect, refund is affected," Sitharaman said at a post budget interaction with reporters in Kolkata.
As a result, businesses claimed that they are not able to plan how much they need to keep aside for taxation in a whole year. Similarly, governments (states and Centre) are not able to make an assessment of what they will earn from GST in the whole year, she said.
“Rate revision every three months brings in uncertainty...We have also discussed it in the GST Council. We have proposed to the GST Council—can we consider a situation, where once in a year alone, we would do any rate rationalization and not every three months," she said.
This is the first time that the Centre has spoken about going slow with the frequency of GST rate cuts. There have been more than half a dozen rounds of rate cuts since the implementation of GST from 1 July 2017, which also impacted the Centre’s revenue. Besides, being a sensitive issue, rate cuts would often snowball into a political issue, putting pressure on government to revise rate, ahead of the elections.
“Yearly revision of rates is a great approach as rates will be stable for at least a year and as a result it will be less cumbersome for businesses as they will not have to track rates after every GST Council meeting. However, there could be problem in case there is any urgent need to revise rate or fix anomalies," said Abhishek Jain, partner at EY. In December, Sitharaman who also heads the GST Council said the government is working on streamlining the GST regime to eventually have three slabs. Currently, there are four key tax slabs—5%, 12%, 18% and 28%. Besides, there have also been discussions on increasing tax rates on some items. However, in the last meeting in December, the Council abstained from raising rates, after official data showed that consumer goods output had shrunk 18% in October, its fifth straight month of contraction. Several state ministers also said the time was not right for raising GST rates.
Sitharaman urged industry to present their concerns pertaining to rate revisions to the states who can in turn take it up at the Council meetings.
“The Centre alone cannot say rates will be cut as it leads to the impression that when the businesses are located in the states, then why are states not talking about it…It will also be healthier if states through ministers voice their concern (at the Council meetings)," Sitharaman said.