A rate hike on several items like mobile phones, footwear, fertiliser, tractors and renewable energy devices, among others, would be considered by the GST Council in its meeting on Saturday to correct the inverted duty structure (IDS) on these goods, sources said. This would fetch the government as much as Rs 20,000 crore annually, which is otherwise disbursed as refunds in lieu of accumulated input tax credit (ITC).
IDS arises when the tax on finished products is lower than its inputs, which restricts manufacturers from utilising ITC. While the GST system allows refund of accumulated credit, this often involves associated cost and efforts along with cash flow issues.
While the move would augment revenue collection, it would not be enough to address the shortfall of protected revenue for states which is estimated to be at Rs 28,000 crore at the end of FY 20. The GST Council in its last meeting proposed several measures, including merging slabs into higher ones, raising rates and cess on existing items, to shore up revenue.
However, it is unlikely any of these options would be approved by the Council just yet, an official said. This meeting would primarily focus on correcting the inverted duty structure faced by certain items so that the regime can work more efficiently, he added.
Sources pointed out that a 12% GST on mobile phones was problematic as most inputs were taxed at 18%. Further, there is no justification for taxing mobile phones at 12% when items like TV, torches, geyser and heaters attract the GST at 18%.
Similarly, sources said that while correcting the tax rate on fertilisers would increase subsidy, and would cause additional burden on the government, this was still desirable for simplifying GST given that this would not impact farmers as fertilizer is a subsidised product and urea prices are regulated.
While the pre-GST tax incidence on fertiliser was 9.75%, it was put in the 5% slab when the GST was launched. This has led to ITC refunds of about Rs 6,000 crore on fertilisers since July 2017.
Man-made fibre also faces the same scenario as products such as polyester, acrylic and viscose are taxed at 18% but their value-add products – yarns – attract GST at the rate of 12%. This inversion is further propagated in the value chain as fabrics attract GST at the rate of 5%. Garments, in trun, attract GST at the rate of 5% (up to Rs 1,000 per piece) and 12% (if more than Rs 1,000 per piece).
Source : Financial Express