Explains | What is next on the agenda for the GST regime?  

Why have rates been hiked for some consumer items? When will the issue of compensation to States be decided?

The story so far: The Goods and Services Tax (GST) Council, chaired by Union Finance Minister Nirmala Sitharaman, met for the first time in 2022 for a marathon two-day meet this week, just ahead of GST’s fifth birthday on July 1. The Council has okayed three ministerial groups’ reports, one of which will lead to changes in the tax rates applicable on several items.

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Based on recommendations made by a Group of Ministers (GoM) led by Karnataka Chief Minister Basavaraj Bommai, the GST Council has scrapped exemptions on several goods and services, done away with concessional rates granted for a few products, and altered tax rates up or down in other cases. Health care devices such as orthopaedic splints, intraocular lens, ostomy appliances, will now be taxed at 5% instead of 12%. The use of in-vitro fertilisation (IVF) services have been exempted, truck rentals for goods will be taxed at 12% (down from 18%) and the GST on ropeways has been lowered from 18% to 5%. However, stem cell preservation services will no longer be tax-free. Hospital room rents over ₹5,000 a day, excluding patients in intensive care units or ICUs, shall now be taxed at 5%. Tetra Pak, used for an increasing number of goods as an alternative to plastic packaging, will now be taxed at 18%, from 12% — which could nudge up costs of several consumer goods. The same 18% rate will apply to tar of all varieties so expect road building costs to rise as well. The Council also hiked rates on over 17 goods and services, where the final products had a lower tax rate than their inputs and led to an anomaly referred to as inverted duty structures. Of these, as many as 10 items’ GST rate has been raised to 18% from 5% or 12% prevalent till now, such as writing, drawing and printing ink, knives, forks, spoons, pencil sharpeners, machines for grading farm products as well as eggs and dairy items, LED lamps, solar water heaters and works contracts for building roads, railways, metro projects, and crematoria. Last but not the least, the GST levied on cut and polished diamonds has been raised from 0.25% to 1.5%.

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The Reserve Bank of India expects India’s inflation rate, which hit an eight-year high of 7.8% in April and remained over 7% in May, to average 6.7% in 2022-23. Ms. Sitharaman said the Council members were conscious of inflation concerns while approving the rate changes. It is too early to discern the possible impact of the new tax rates on the overall inflation experience and how much of it will be captured in the official data. With all these rate changes slated to kick in from July 18, any impact can only be gauged when August consumer inflation numbers are released in the second week of September. Even then, with prices of several commodities, including crude oil, remaining elevated, distilling the effect of new GST rates on price rise may not be simple.

Moreover, the panel led by Mr. Bommai has been granted three more months to delve into its other mandate that could have a wider impact on consumers and businesses — rationalising the multiple GST rate slabs such as 5%, 12%, 18% and 28% and raising levies to bolster revenues that have fallen short of expectations. Part of the reason for dipping revenues, apart from a slowing economy in recent years, was the repeated reduction in several items’ GST rates ahead of critical elections. However, officials concede that inflation worries do not make this an opportune time for carrying out broader rate hikes.

The Council will meet again in August to finalise the GST rates for online gaming, horse racing and casinos — a decision it put off this time for fresh stakeholder consultations. It may also kick off the process to form an appellate tribunal for resolving GST disputes, envisaged since its launch in July 2017. With over a dozen States urging the Centre to continue the GST compensation paid to them for the first five years of the GST regime as revenue flows have been hit by the pandemic, it is hoped that clarity comes through on this issue by the August meeting. Any extension of assured revenues to States could, however, translate into further pain for consumers and industry, who already have to fork out the GST Compensation Cess levied on products such as cars and soft drinks, till March 2026, instead of the June 2022 sunset promised earlier.