With the GST regime completing four years, Modi added that it has also significantly increased transparency, compliance and overall collection.
With the GST regime completing four years, Modi added that it has also significantly increased transparency, compliance and overall collection.

As the nation gets underway to convalesce from the havoc caused by the COVID-19 Second Wave, it faces various impediments particularly to grapple with the losses incurred and revive the economy even as the threat of a third wave looms large.

Despite government measures to alleviate the plight of various sectors, many sectors have writhed in such a way that calls for deft and exigent policy changes in the Goods and Services Tax (GST) regime to boost their working capital.

Introduction of GST with a ‘one nation, one tax’ approach was an inflection point in the history of the nation’s economic reforms and its staggered, yet effective implementation has resulted in much-needed stimulus for the Indian economy. However, since its introduction in 2017, much water has flown under the bridge and present circumstances require definitive revisiting of GST rates and mechanism to account for the following anomalies:

Pandemic and economic contraction

While the one and half years of pandemic has caused ineffable grief in the form of loss of millions of human lives, its impact on the economic activities has been equally disruptive. Almost all the sectors have been adversely affected as domestic demand and exports sharply plummeted.

Rising uncertainty, reduced consumer and business confidence coupled with negative economic growth for the financial period of FY20 to FY22 and economic contraction during the three years preceding the pandemic has led to weakening of investments and trade performance of the Indian economy.

While the government is looking to increase its tax collection to recuperate the aftermath of the pandemic, the sectors are optimistic of government relief. What is required in such a perplexing situation is for the government to cautiously balance the requirement to increase the revenue and not overbear companies to force out of business.

It is significant to realize that the tax revenue can rise only when sectors are provided with reliefs they require to recover from the impact of lockdown and use available resources to generate consumer demand in the market.

Complexities of GST regime, accumulation of ITC

There have been demands raised for exemption of certain goods from GST. However, exemptions under GST come with the cost of blocking ITC and thus cause higher input tax costs for businesses. Such exemptions may not only be injurious to the industry by adding to the cost of the finished, but will also impact consumers at large and will not revive demand. Hence, the requirement is for reduction and rationalization of GST rates in specific sectors and not for complete exemptions to ensure that revenue losses are minimized and leakages are avoided.

It is imperative to cater to specific needs of certain sectors that have been most affected in recent times, particularly tourism/hospitality, automobile, service and pharmaceuticals.

Service sector likely to benefit most

Indian economy is a service-based industry comprising 60 percent and is most likely to benefit from GST cut-down in the service industry. The current applicable GST rates in the service industry ranging from 5 percent to 28 percent raise concerns for SMEs, professionals and consumers. Furthermore, GST rates in the context of essential goods and services need to be maintained at a uniform rate of 5s.

Automobile sector woes

Currently, the GST slabs range from 5 percent to 28 percent in the automobile sector depending on the type of vehicle. Total tax, including compensation cess can go as high as 50 percent in case of a certain class of cars. It has been continuously recommended that there is a GST rate cut on both four-wheelers and two-wheelers and more vehemently for the latter since they are neither sin nor luxury goods meriting a rate cut from 28 percent to 18 percent.

Pharma needs rationalised GST rates

The pharmaceutical sector has been on the rise since the start of the pandemic, especially in India. Although this sector has seen an increase in its market size, it has not been insulated from other challenges such as upsurge in prices of imported raw materials, disruption in supply-chain, unavailability of labour and government-imposed bans on the export of critical drugs and equipment. Hence, there is a need to rationalise GST rates and that may actually compel the sellers to reduce prices under the GST law.

Consider relaxing regulatory compliances

GST was primarily introduced to free the sectors and consumers from the shackles of taxes and to put India on the global competitive landscape. The GST council formulated a four-slab rate structure – 5 percent, 12 percent, 18 percent and 28 percent - along with 0 percent exempt category, 3 percent on gold and additional cess charged on certain products, making it effectively a 7 tax-slab rate structure.

Broadly, as a micro-level policy recommendation, the government can provide a breathing space to the sectors by way of rationalizing GST rates, relaxing regulatory compliances and adopting payment of GST on receipt basis instead of invoicing basis among other measures. These measures can account for the adversarial impact of COVID-19 and economic slowdown and assist sectors in treading a new path in this tentative milieu.

(Tushar Aggarwal is Founder and Partner, Tattvam Advisors-consultancy firm)

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