The debate on GST compensation to States is again likely to be re-ignited in light of the impending shortfall in revenue.

Just when the economy was slowly limping back to normalcy and there was an uptick in GST collections, the second wave of COVID caught us dead in our tracks, and how!!

The Ministry of Finance was quick to announce various relief measures under GST and Customs to ease the accessibility of Covid vaccines and medical equipment, such as reduction in customs duty on Covid vaccines and related goods imported into India, reduction in GST on oxygen concentrators imported for personal use from 28% to 12%, IGST exemption to oxygen concentrators and other Covid related medical equipment imported free of cost for free distribution in the country, so on and so forth. Basic customs duty on import of all such goods was also done away with earlier. Further, like last year, the government also relaxed the timelines for monthly GST compliances.

Simultaneously, the Government is also mobilised global support for waiving non-tariff barriers on COVID-19 vaccines. India and South Africa floated a proposal in October 2020 at the WTO’s TRIPS Council to temporarily waive protection of the WTO’s TRIPS agreement, which requires all its signatory countries to enact domestic laws which guarantee minimum standards of IP protection. The waiver of such protection during national emergencies granted by provisions of Doha Declaration adopted by WTO in 2001, may facilitate fair, affordable and universal access of COVID vaccines and medicines, especially for developing countries.

However, with health infrastructure collapsing in many states and the ensuing loss of life and livelihood for many, what can the GST council possibly do in its 43rd meeting to rescue businesses?

Well, desperate times call for desperate measures and the government should be ready to bite the bullet. First and foremost, serious discussions will need to be carried out to draw a road map for getting natural gas into the GST ambit. The Council had in principle agreed to include five petroleum products under GST but due to the pushback from various States, on the fear of losing VAT revenue, the decision has been put on hold. However, the time is ripe for the government to at least bring natural gas under the GST regime. This will definitely help in bringing down the cost of natural gas for domestic as well as industrial users.

Another focus area should be a correction of inverted duty structure, especially in sectors such as fertilizer, steel utensils, solar modules, tractors, tyres, electrical transformers, pharma, textile, fabric, railway locomotives among other goods is required. Inverted duty refers to tax rates on inputs being higher than those levied on finished products. This results in higher input credit claims by goods besides several administrative and compliance issues.

Many corporates have arranged for medical equipment and vaccination drives for their employees. Going by a literal interpretation of the applicable GST laws, such free-of-cost supplies by companies to their employees may attract GST as well. The council should announce exemption or zero rating on such free of cost supplies by corporates to its employees to ease the GST burden.

The council should also consider lowering of GST rate of 28 per cent on two-wheelers to give a boost to its sales affected during the pandemic. With a pickup in rural demand, as seen with increased tractor sales, any cut in rates would help the two-wheeler makers to increase sales with competitive pricing.

Apart from the above, this is possibly an opportune time for the Council to set the ball rolling for tax-slab rationalization. The multiple slabs have long been a subject of criticism and perhaps this is the right time to look at ways to rationalize the GST rates and reduce the number of slabs. This should bring much more efficiency in tax administration as well as increase the tax base and compliances resulting in improved GST collections.

The debate on GST compensation to States is again likely to be re-ignited in light of the impending shortfall in revenue. With the health infrastructure of most States under stress and the Centre putting the onus on the States for procuring vaccines, the States are in dire need of funds to deal with the Covid crisis. Therefore, they are likely to come out all guns blazing for the release of compensation cess as soon as possible to overcome the crisis. It will also be interesting to see the mechanism devised by the Council to make up for the revenue loss.

Since this meeting is being held after a long gap of almost 7 months, there will be a lot on the plate of the Council to deliberate upon. However, it is imperative that the Council makes most of this meeting and comes up with bold and concrete steps to counter the impending economic crisis and support the businesses at this hour of despondency.