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India GST Council widens tax net; state compensation deadlock

GST state compensation ends tonight in deadlock; rate rises and removal of exemptions on certain supplies despite inflationary worries

The July meeting of the Goods and Services Tax Council meeting approved rate rises on a range of supplies, plus the removal of some exemptions from the consumption tax. But as the 5-year state compensation scheme ends on 30 June 2022, today, no decision on its extension or reform was met. Any decisions will be postponed to the next Council meeting in August.

The hikes and new GST supply inclusions comes as India inflation hit over 7% in May 2022. Wholesale inflation reached over 15%, the highest in nearly 30 years.

State compensation decision deadline missed

In July 2017 with the launch of India Goods and Services Tax, the GST Compensation Act, 2017 provided for five years of compensation payments to the 28 Indian states which lost revenues from the reforms. This expires midnight today.

The GST state reparation payments from the Centre government are made up of two elements:

  1. the difference between states’ collections and the amount states would have received with annual growth at 14% over the 2015-16 receipts; and
  2. a levy, or cess, on automobiles, tobacco, drinks across the country

The 2017 forecasts estimated that the compensation payments would only be needed for 5 years as the economy grew, and GST payments rose. Within the GST charge, there is an element of the tax reserved for the states (see below). In the second of the above repatriation pools, the cess, there is now a deficit of Rs 300,000 crore.

All parties will revisit the issue at next August’s meeting.

GST Exemptions withdrawn

The removal of exemptions covered 15 items, including lassi, butter milk, pappad, certain food grains (oats, millets, bajra), jaggery and some vegetables. Non-packaged or labelled supplies of the same remain exempted.

Goods reclassified to higher rates

A range of goods were also lifted through the four main rates: LED lamps, ink, knives, blades, power-driven pumps, and dairy machinery and for milling machinery for cereals. Hotel accommodation costing under Rs 1,000 per day will be taxed at par with the industry (12 per cent). Hospital rooms except ICU, with a daily rent of Rs 5,000, could be taxed at 5 per cent without ITC.

At the same time, tax rates will be lowered for about half a dozen goods and services, including ropeways and truck rentals where fuel costs are included, and scrapped for products imported by private vendors for use by defence forces. The GST rate on splints for treating fractures, intraocular lens for those with failing eyesight and ostomy appliances will be reduced from 12% to 5%.

Upgrades in technology to tackle GST fraud

Updates in GST’s IT systems to reinforce compliance and squeeze tax evasion were approved, too. These include a new risk-based registration system that will be put in place over the next three to six months to curb the menace of fake invoicing by criminal gangs.

GST registration threshold for sellers using digital platforms

The Council made a recommendation to give sellers of goods or services via a digital platform as GST registration threshold of INR 2 million per annum. This would be limited to sellers only selling within their own states.

Major GST reforms deferred

The proposal for new margin schemes for tour operators, taxing virtual digital assets, setting up a GST tribunal, ease of compliance for small e-commerce retailers, and tax exemptions on services to panchayats and municipalities has been deferred.

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