Reimagining GST for the post-COVID era
There appears to be a common wish list for all stakeholders in the new economic paradigm—that the Goods and Services Tax (GST) Council reverse its role; from making recommendations on how to tax to transforming itself into an institution invigorating economic revival. For one, this wish list is clearly terra firma. The constitutional framework, with the enactment of a specific provision — Article 279A—has literally entrusted the entire policy space on indirect taxes to the GST Council, which brooks no limitations.
In the light of such a mandate, the expectations are high from the upcoming GST Council meeting. Without doubt, revival of economic activity should overwhelm its agenda. However, what exactly can the GST Council dwell upon? The answer perhaps lies in reimagining GST for the post-Covid era.
The Union government recently announced a host of measures, seeking to support industries and businesses to get back on their feet. With such liquidity and fiscal support and expectations of further indulgence by the government, there is no doubt that business entrepreneurs will pull out all the stops to make up for the losses on account of the lockdown. This takes care of the production wheels. The challenge that now remains to be addressed is on the demand side or consumption, and this is where the GST Council’s role assumes significance, given that GST is a consumption tax.
The challenge for the Council, which obviously is flooded with requests from industry for a fiscal stimulus similar to the one in 2008, lies in ensuring that it resists the temptation of addressing all problems in one go. Instead, policy-makers must look for an institutional response that cuts across the competing claims of stakeholders and helps in reviving economic activity and consumption across a diverse industrial segment. This requires intelligent categorisation of the business units that differentiates between the sectors on the basis of their priorities to frame impactful solutions. The reason is that a one-size-fits-all cut in rates across the board— as in 2008— will not be optimal, let alone aligned to the fiscal constraints.
The recent World Trade Organization Information Note on the impact of Covid on trade in services is a formal acknowledgement of the need for specific measures, especially for the sectors that rely on physical presence for supply, such as tourism, transportation, and offline-entertainment. A revival package, therefore, appears necessary for such affected industries. Policy-makers may recall the sales tax-era incentive schemes where the supplier was permitted to collect and retain the applicable tax for a defined time frame, which assisted capacity-building measures, loan-repayment obligations and funded other business priorities. These schemes have been highly successful; targeted clusters such as the Noida and Greater Noida industrial area in Uttar Pradesh being the quintessential example. On similar lines, the GST Council can recommend a revival package with graded incentives ranging from a complete GST waiver, say, for two to five years for the severely impacted industries and an instalment-linked or deferment plan for the other identified industries. In the former, let us call it the waiver-package, the supplier would be permitted to collect and retain GST for a specified period similar to a sales-tax deferral scheme. In the latter, which we call deferment-package, let the discharge of GST liability, which is currently monthly, be staggered to quarterly or biannual, whereby the supplier would be able to deploy the GST collection to meet short-term working capital requirements.
The response has to vary depending on the sector. To highlight, the silver lining of the lockdown is the reinvention of online supply models. It is heartening that at least some sectors will grow profitable as these business models set in. However, instead of being short-sighted and seeking to offset the revenue foregone, a long-term view is necessary, and thus the need for institutional support. Retail, health, education, and audio-visual services, which can further expand online should be facilitated. Most crucially, the telecommunication industry, the successful functioning of which underlines the very idea of a strong digital economy, must be hand-held to promote recent advances in technology as they constitute the backbone for the growth sectors, besides the larger economy. The recent developments on adjusted gross revenue (AGR) have merely exposed the sector’s vulnerability. There is a crying need for a new telecommunication policy — the latest one of 2012 being clearly obsolete — which addresses not just the telecommunication service providers, but also the industries that depend on them, and the consumers, who are increasingly choosing to transact online, besides the impact of the Apex Court judgment on the AGR issue.
Following demonetisation, the government incentivised online payments. Now it is time to shift to the next gear by incentivising online consumption of goods and services. This could be by way of reduced GST rate on online supplies, deferral of equalisation levy, which also furthers the twin goals of a digital economy and rationalising compliances, besides unburdening the small and medium industries. Infrastructure development in these sectors should also be pushed by further tax rebate, which could be linked to other externalities, such as infrastructure creation, incremental investment and job creation.
The GST Council must also consider an across the board temporary rebate on white goods and those which fall within the 28 per cent slab, such as construction-related products made of stones, cement, paints, varnishes, marbles, granites, furniture-related goods and automobiles. The same holds good for high-tax services, such as construction, hotels and entertainment. A two-year window for reduced tax incidence or deferral on such goods and services is likely to increase their demand, which in turn will stir the industry. Policy-makers must stay alert to rise in unemployment due to Covid-19 and address the woes of intrinsically labour-intensive industries or those which depend upon migrant labourers to calibrate the schemes with employment-linked subsidies and exemptions.
As one will find, the above measures do not mention the recurring issues such as exporters’ woes, GST network (mal)functioning, inverted-duty structure, input credit restrictions and late-fee waivers. The list is a long one and these issues tend to have an impact on the efficacy of India’s business enterprises. The intent of not listing all of them is not that these issues do not require resolution, indeed they do. However, this is not the time for the policy-makers to devote their attention and political capital on resolution of ground-level issues; instead the focus must be on structural changes that work in tandem with other measures and thus harness synergies in addressing economic woes.
Evidently, critics may challenge these propositions on the grounds that they tend to shake up the design. They do, though temporarily and for the greater economic good.
The author is managing partner, BMR Legal, views are personal.