Why keeping GST simple is getting increasingly difficult

Some of the decisions taken by the Goods and Services Tax (GST) Council recently, including those on rate changes, confounded many. Bipin Sapra and Swati Saraf Pahuja explain the rationale behind the decisions and why some contentious issues will require further deliberations.

l  Reversing the ‘Safari Retreats’ judgement

IN THE SAFARI Retreats case, the Supreme Court had ruled that the meaning of the terms ‘plant or machinery’ and ‘plant and machinery’ in the CGST Act were different. The Court held that eligibility for input tax credit (ITC) depends on whether a building qualifies as a ‘plant’ based on its intended function, particularly when it is meant for leasing.

However, the GST Council has proposed to amend the law retrospectively to replace the term ‘plant or machinery’ with ‘plant and machinery’ with the reasoning that the lawmakers always wanted to exclude immovable property from the definition of plant and machinery and hence block ITC availment. Reversing the law vitiates the industry’s trust in the fairness of the dispute resolution mechanism. The amendment would impact the industry wherein the taxpayers had hoped to recover ITC on the cost incurred on construction of building, basis the interpretation of classifying it as ‘plant’ as given by the apex court. A Group of Ministers (GoM) to re-evaluate these blocked credits is the need of the hour.

l Hike in tax rates on sale of used vehicles, including EVs

UNTIL NOW, SALE of a specific category of old and used cars (based on the engine capacity and length of the vehicle) including Electric Vehicles (EV) attracted 12% GST on the value that represents the margin of the used cardealer or reseller platform, which is basically the difference between the sale price and purchase price/ depreciated value of the vehicle on the date of sale.

The GST Council has now recommended an increase in the GST rate from 12% to 18% for sale of used cars, including EVs. Even though the higher rate would be only on the margin, the impact on the EV segment would still be much larger. A concessional rate of 5% tax is prescribed for sale of a new EV vs the 18% rate on the sale of used EVs.

l  Caramelised popcorn & classifications

THE GST COUNCIL raised the tax rate on ready-to-eat popcorn to 18% in cases where it is mixed with sugar, thereby changing its character to sugar confectionary. Remaining variants of popcorn with salt and spices will continue to attract 12% GST. The decision, apart from increasing prices for consumers, would lead to interpretation issues for classifying variants such as salted caramelised popcorn. The question is not of popcorn alone but many other products which face such classification dilemmas; why single out a product when a GoM is examining the entire sector with a lens?

The debate on the popcorn rate classification emphasises the need for  proper rate rationalisation for not only the food sector but other sectors too, since in practice, all face the popcorn rate classification-type conundrum.

l  Keeping ATF out of GST

THE COUNCIL DECIDED TO keep Aviation Turbine Fuel (ATF) out of the GST ambit. ATF is one of the low-hanging fruits to begin extending the GST net to the oil sector, given it is used in the airline industry only and chances of leakage are minimum. Yet the states in the Council not only stepped away from examining this but did not accept a proposal to refer this to a GOM, a step which will further defer bringing the petroleum sector within the GST fold.

l  Fortified rice, gene therapy

FORTIFIED RICE ATTRACTS a GST rate of 18% except when supplied for the central government’s Integrated Child Development Services or other similar schemes where a concessional rate of 5% is levied. The Council has now reduced the GST rate on fortified rice to 5% irrespective of its end-use.

The decision to reduce the rate of GST from 12% to nil for CAR-T cell therapy is a relief for blood cancer patients given the prohibitive cost of such treatments.

l  Key unresolved issues

OTHER DECISIONS THAT were deferred for want of further deliberations include that on restaurant supplies delivery via e-commerce operators, determination of tax liability for passenger transportation services through e-commerce operators in terms of different business models being adopted by the industry, intermediary services being considered to be brought under the residuary clause in terms of place of supply.

What is now awaited are the reports by various GoMs, starting with the GoM on rate rationalisation, including the one on insurance rate structure which has been in the works for sometime now, besides those looking at rectifying inverted duty structures across multiple supplies and resolving classification disputes. What is expected of the GoMs is to find progressive solutions; in this respect, the reports of GoMs on real estate and compensation cess are eagerly awaited.