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The 55th meeting of the GST Council was followed by a lot of chatter and fun on social media, particularly on the announcements regarding the tax rates on popcorn and sale of used electric and motor vehicles. The outrage, jokes and memes over GST on sale of used cars and EVs are however overdone, borne out of incomplete understanding of the changes made.
A quick read of the press release issued after the GST Council meeting would have avoided the unnecessary angst.
The press release says, “GST is applicable only on the value that represents margin of the supplier, that is, the difference between the purchase price and selling price and not on the value of the vehicle. Also, it is not applicable in case of unregistered persons.”
The release makes it explicit that — one, the tax liability is only on companies or used car dealers; individuals are out of the ambit of this GST. Two, the tax is on the value added by the used car dealers, which is represented by the difference between the purchase and sale price. This is good economics.
The FM appears to have switched the sale and purchase prices while explaining the tax on sale of used EVs in the press conference after the GST Council meeting. But after a long and grinding day, listening to the raucous discussion of the Council, surely this slip can be excused.
The clarification on popcorn is, however, hilarious. Taxing salted and non-pre-packaged popcorn at 5 per cent, salted and packaged popcorn at 12 per cent and caramelised popcorn at 18 per cent, goes to highlight the mire that the entire GST system is sinking into.
With growth in GST revenue settling down to a sober trot, every nook and cranny is being explored to increase revenue. At the same time, there appears to be a reluctance to reduce rates in segments where they are much needed, such as health insurance premiums.
In the coming year, the Council will do well to look beyond tax rates, at the GST tax base. The tax base of indirect taxpayers seems to have reduced while transitioning to GST due to higher exemption thresholds under GST. Additional leeway to small businesses in the early years also seems to have reduced the tax base.
Reducing the turnover threshold for exemption from GST liability, especially for service providers, needs to be considered to bolster revenue. This should, however, be accompanied by lower tax rates to improve compliance.
Low tax base
Total number of registered GST payers has grown from 99 lakh in January 2018 to 1.48 crore towards the end of October 2024. But the growth has largely been in new registrations – rising from 40 lakh in January 2018 to over 1 crore now. The number of assessees who have migrated from the earlier sales tax/VAT regime, has fallen from 70 lakh to 42 lakh in this period.
Around 77 lakh taxpayers were to be migrated from the previous indirect tax regime to the GSTN. But this number is unlikely to have covered all the taxpayers of the taxes subsumed under GST. Because the GST system had pegged the turnover threshold for exemption from GST for service providers higher at ₹20 lakh, up from ₹10 lakh in the previous system. This would have allowed many taxpayers to drop out of the tax-net.
The decline in migrated taxpayer base could partly be due to the Covid pandemic impacting micro business enterprises severely. But concessions given to small businesses in the first two years of GST implementation could also have reduced the registration numbers.
Changes in exemption thresholds
When GST was initially designed, entities dealing in both goods and services, with turnover under ₹20 lakh, were exempt from the GST levy. Some small businesses were allowed to register under the composition scheme where they paid tax at a lower rate without tax credit and filed returns less frequently. The turnover threshold for availing composition scheme was ₹75 lakh.
Latest data, towards the end of October 2024 shows that there are 1.3 crore normal taxpayers while 14.9 lakh are composition taxpayers.
With small businesses making a din about the increase in compliance burden after GST, the 32nd GST Council meeting, held in January 2019 gave sweeping concessions to small manufacturers.
It gave States the option to increase the turnover threshold for exemption for goods to ₹40 lakh. The threshold for services was maintained at ₹20 lakh.
The 32nd GST meeting also increased the turnover threshold for claiming composition benefit to ₹1.5 crore, thus allowing more entities to pay tax at a lower rate. It also allowed service provider with turnover under ₹50 lakh to pay GST at a lower 6 per cent.
Decrease the threshold
As things stand, service providers with turnover between ₹20 and ₹50 lakh can pay GST at 6 per cent and those with turnover under ₹20 lakh pay no GST at all. Only those with turnover above ₹50 lakh pay service tax at 18 per cent. Exempting a bulk of service providers from indirect taxes when the share of services in the GDP is growing sharply is obviously costing the exchequer dearly.
Indirect tax collections in India have always registered a far lower growth rate when compared to direct taxes. The large informal economy and under-invoicing by suppliers by collecting part of payments is cash has been impacting indirect tax collections over the years. Inducing more businesses in the informal sector to register for GST is the way forward.
This can be done by lowering the turnover exemption threshold to ₹10 lakh for service providers. But this needs to be accompanied by sharp reduction in service tax rate. Nudging higher adoption of digital payments, which leaves a money trail, could help identify businesses which are evading registration, despite having a high turnover. Change in exemption threshold for suppliers of goods may not be needed for now.
The group of ministers on rate rationalisation too has an important role to play in crafting the way forward for the GST regime. Simpler tax system, keeping in mind the end users, will avoid gaffes of the kind seen recently.
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Published on December 31, 2024
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