Strengthening the GST regime

GST Council might review an interim report on rate rationalisation. This will be crucial

The two-day meeting of the Goods and Services Tax (GST) Council that starts on Tuesday is the 47th of the body – but it is likely the most important to date. Not because the contentious issue of extending the compensation period (it ends on June 30) is likely to dominate it. When the GST law was passed in 2017, states were assured they would be compensated for the potential loss of revenue on account of moving to the GST regime. The compensation was for five years assuming an annual growth of 14% in revenue. The final payout was made last month, although the GST compensation cess on luxury and sin products will continue till 2026, to pay off loans taken (by the Centre) to compensate the states between 2019 and 2021, when Covid took a toll on the economy. A clutch of states (mostly ruled by non-National Democratic Alliance parties) are pushing for an extension of the compensation period. And even Bharatiya Janata Party-ruled states are hoping for some form of support. Purely from the economic perspective, an extension isn’t a great idea – but such decisions usually involve more than economics.

Not because the meeting is the first after the Supreme Court said in a ruling that the GST Council’s recommendations are not binding, and only have “persuasive” value. Some states cheered the judgment, and saw it as the restitution of powers they gave up when they agreed to GST. As officials in the finance ministry have clarified, this changes nothing. The meeting is likely the most important one of the GST Council because it might review an interim report on rate rationalisation. The GST regime has been characterised by far too frequent rate changes (usually reductions), and the report, put together by a group of ministers (it is headed by the Karnataka chief minister) is expected to suggest ways to broaden the tax base by removing exemptions; review the existing tax slabs; and address the problem of inverted duty structures. It is evident that some exemptions will have to go. It has also been evident that far too many products and services have been pushed to the lower tax slabs. A case can be made that had both these issues been addressed early on, states may well have been in a position where they might have sought an extension of the compensation period.

GST is a fundamental reform; over the past few months, revenues have stabilised at a healthy level; and over the past year, compliance has clearly increased. It is now time to strengthen it.