On one hand, the industry players and the businesses dealing with the perils of the pandemic, were hoping for indirect tax sops from the government, on the other hand, the citizens of the country were looking forward to grant of relief from taxes levied on COVID-19 vaccines and critical medical supplies. Also, the state governments facing fund shortage on account of a slow economy coupled with revenue loss induced by the second wave of COVID- 19, were anticipating discussions on the topic of compensation cess.
In this article, we attempt to look into as to how the GST Council has catered to the expectations of the various stakeholders, and what comes next on the governments’ s agenda post this 43rd GST Council meeting.
On the topic of COVID related reliefs, one major change introduced by the Council was the grant of IGST exemption to specified COVID -19 relief goods purchased for free distribution/ donation to the government, or state authority approved relief agency. On perusal of the language used in the press release, it seems relief goods can be imported without paying IGST even by the corporates/ businesses, if so, procured for donation to government or approved relief authority. It will be interesting to see if this understanding is also upheld by the official notification to be issued in this regard. It is worth noting here, that this change was in addition to other reliefs of interest rate and late fees rationalisation, provided by the GST Council.
Furthermore, the Council with the intent to ensure that any additional benefit extended by it (other than those already provided), reaches the Indian citizen, referred the other matters relating to grant of COVID – 19 related reliefs to a committee of Group of Ministers (‘GoM’) to be formed consequently. The Finance Minister said that this step was necessary as further detailed discussions were required to ensure that the benefit actually reaches the citizen of India.
Given this, let’s look into the anticipatory agenda items that may be taken up by the GoM:
First, on the issue of grant of relief from GST levied on COVID-19 vaccines, the government seemed to be of the view that majority of these supplies are being undertaken by the State(s) or Centre on free of cost basis, and as such the end citizen does not have to bear the burden of these taxes, and also the GST paid by State(s) and Centre on such supplies are given back to them as a part of their revenue collection. As such, the GoM in its meeting can consider providing appropriate relief to the remaining segment of citizens who are getting vaccinated from private organisations on payment basis
Second, he Council seemingly has extended the IGST exemption to COVID relief goods imported for donation to government or approved relief agencies. The GoM can in furtherance to this, consider extending the benefit of IGST exemption to COVID-19 goods procured by businesses/ private organisations and distributed free of cost to their employees and family members, or even otherwise distributed within the society. The benefit can also be extended to COVID-19 relief material imported by individual on purchase basis, for personal consumption.
Lastly, in case GST exemption for supply of COVID-19 relief material is not granted, the GoM can consider allowing input tax to businesses who are involved in making free of cost donations of such material.
Now, moving on to the other big ticket item on the Council’s agenda, being compensation cess, the expected decision of the GST Council to adopt the last year formula of borrowing funds and passing it as back to back loan to the States, should have catered to the expectations of the various State governments. The government intents to borrow INR 1.58 lakhs crores in total which is expected to provide the much-needed relief to the State governments from the revenue crunch that they had to face given the economic situation.
As regards the larger issue of continuation of compensation cess beyond the originally agreed period of five years, the GST Council proactively clarified its intention to table this discussion in a special GST Council session to be held in the coming future. This was necessary as the Council will have to consider a multitude of factors before arriving at a final decision on this topic.
It is expected that the levy of compensation cess will continue beyond June 2022, especially to pay off the borrowings made by the government to meet the shortfall of revenue faced by the State(s) in the five years post introduction of GST. Given this, the discussions in the special session are likely be around issues such as:
- Whether the continuation of compensation cess beyond originally agreed five years is to be undertaken only to pay off the borrowings made during the said five years, or for the purposes of further compensating the State for loss on revenue beyond the originally agreed period of five years, i.e. beyond June 2022
- In case GST Council decides to compensate the States for loss of revenue beyond five years, the GST Council will have to also agree on the growth rate to be factored in for the purposes of calculating the revenue deficit to the states
- Duration for which the levy of GST compensation cess is to be extended
- Whether the existing rates for compensation cess are to be continued, or new rates are to be notified
- Whether any inclusion or exclusions are required to be made from the list of goods leviable to compensation cess
The GST Council for the purposes of above discussion will have to also factor in topics such as, if and by when petroleum products or electricity are to be included in the GST ambit and the impact it will have on State revenues, the projected revenue from compensation cess vis-a-vis the state deficits in the coming years, etc, before making any final decisions.
Coming back to the agenda items of the GST Council meeting, the GST Council also issued clarifications on miscellaneous topics of GST levy and GST rates. Here the issue of correction of inverted duty structure as is applicable for sectors such as textile, solar, fertilizers, etc was not addressed as the Council was of the view that this is perhaps not the right time. Further, other topics such as tax-slab rationalisation, GST rate cut for two wheelers, etc were also left out of the discussion. Having mentioned this, these topics may be subsequently addressed in the upcoming GST Council meetings.
From an overall point of view, the GST Council in all fairness picked up all the relevant issues which were expected to be addressed during this meeting, a few of which were resolved in the meeting itself and the remaining few are expected to resolved in the near future basis the comments from the GoM, and decisions arrived at by the special GST Council meeting.
(Abhishek Jain is Tax Partner, EY India. Oshank Mittal, Senior Tax Professional, EY also contributed to the article)