What's On The GST Council Table: Health Insurance, Car Taxes, Two-Slab System

(MENAFN- Live Mint)

The federal GST Council begins a two-day meeting today to chart the biggest overhaul of the indirect tax regime since its debut seven years ago, aiming to spark a consumption-led recovery in the face of global trade uncertainties that have dampened private investment and job growth.

The proposals before the Council attempt to lower costs, raise output and stimulate economic activity, especially in agriculture, textiles, fertilizers, construction, transport, renewable energy, handicrafts and insurance, two persons informed about the matter said.

On the Council's table are proposals to exempt GST on health insurance premiums at a cost of about ₹10,000 crore a year; shifting close to 50 products in the 12% slab including condensed milk, cheese, dried fruits and preserved fish and vegetables to 5%; and moving close to 25 items including chocolates, ice cream, cakes and corn flakes in the 18% slab to 5%.

Replacing cess

Pan masala, tobacco and caffeinated drinks are set to move from 28% to 40%. The existing GST compensation cess on these items will expire later this year, but another levy may take its place following requests from several states, though the final form of that levy is still under discussion, one of the two people said on condition of anonymity.

These are part of the central government's proposals which were endorsed by a ministerial group led by Bihar deputy chief minister Samrat Chaudhary last month and will be placed before the Council on Wednesday.

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While there is broad consensus on the Centre's proposals and the tax relief to the common man announced by Prime Minister Narendra Modi in his Independence Day speech this year, eight non-BJP states have flagged their concerns about immediate revenue loss on account of the proposed tax cuts.

They are set to highlight this at Wednesday's meeting. However, none have objected to the central government's proposals as these are meant to benefit consumers. The final form of the tax reform will depend on the give-and-take agreed to at the meeting.

Inverted duty fix

Other proposals include shifting about a dozen farm equipment including certain tractors, hand carts, machines for soil preparation and cultivation and sprinklers from the 12% slab to 5%. Some tractor parts such as rear tyres may also get tax relief from 18% to 5%. Certain raw materials for fertilizer production, ammonia, for example, are likely to see a tax cut from 12% to 5%.

Correcting the anomaly of inverted duty structure is also part of the tax reform. As part of this, about 40 items from swing thread of manmade filaments to carpets and wall coverings are likely to get their tax rate lowered from 12% to 5%. Correcting the inverted duty structure will remove the bottlenecks in fresh investments into these sectors, as businesses need not wait for refunds for taxes paid on raw materials which they cannot recover from the final consumer.

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Experts said the GST revamp will help in two ways, stimulating demand for goods and services and moving towards the ideal indirect tax regime.

“The tax reduction will act as a stimulus. The advantage of a stimulus by way of a tax restructure is that it is reversible, unlike in the case of stimulus by way of expenditure, which often come without a sunset clause. The proposed simpler GST structure takes it closer to the ideal 'one nation one tax' concept," said N.R. Bhanumurthy, director, Madras School of Economics.

The stimulus has to be followed by a revival in private investments, said Bhanumurthy.

ACs, TV sets

As per the proposals, consumer electronics items like air conditioners with certain features, television sets and dish washers are likely to become cheaper. Some high-capacity cars, however, will move from 28% to 40%.

In the health sector, tax relief is likely for a host of products including diagnostic kits, surgical gloves, medical-grade oxygen and breathing appliances, as per the central government proposal.

Mass-use items like cycles and kitchenware are also likely to see a reduction in tax rate from 12% to 5%, while items like hair oil and shampoo may see a reduction from 18% to 5%.

Close to 20 classes of vehicles including petrol, CNG and LPG vehicles with engine capacity up to 1200 cc (1500 cc in the case of diesel vehicles) and length of four metres are likely to be shifted from 28% to 18%. Larger engine capacity vehicles-exceeding 1500 cc and 4 metres length including those with electric motors may be shifted to the proposed new 40% slab.

Automatic refunds

Also on the table is a proposal to automate tax refunds based on the risk profile of the business, which will remove subjectivity in issuing refunds. This is expected to improve the ease of doing business.

Queries emailed to the finance ministry and to the GST Council Secretariat remained unanswered.

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The Council is also expected to review the checks and balances needed for ensuring that businesses will pass on the benefits to consumers.

Bhanumurthy of Madras School of Economics had earlier highlighted in his research papers that revenue growth and economic growth may move in the same upward direction upto a point, after which, high taxes may impede growth. The present structure and rate of GST appear to impede growth and, hence, reducing rates could stimulate demand, he explained.

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