GST Council to Address Inverted Duty Structure Issues in Its Next Meeting

The GST Council will be meeting after over two months this August-end to discuss issues such as the compensation cess and inverted duty structure. The Council may also include on its agenda the cutting down of the list of GST-exempt items, among other things. The Council intends to maintain the overall principle of tax stability. 

Revenue Secretary Tarun Bajaj recently acknowledged at a virtual meeting of the Confederation of Indian Industry (CII) that the current GST rates in certain sectors are still high. He said that the GST rate of 28% on four-wheeler vehicles would continue for a few more years. He explained that the revenue-neutral rate was 15.6%, which is the weighted-average rate needed for the transition to GST in 2017 to be a revenue-neutral affair. However, the current rate is only around 11.4% or 11.5%, according to a Reserve Bank of India (RBI) study. 

He further explained that while the rates have reduced at a macro level, they have gone up in certain sectors. He said that one has to look at solutions to bring down these rates, remove items under the exempted list, and rectify the inverted duty structure.

The inverted duty structure has been a topic of discussion in several GST Council meetings. However, there has been no conclusion reached up until now. The Revenue Secretary’s comments indicate that the list of GST exemptions needs to be cut down to lower the tax rates on certain items. This will take away the anomaly of the government having to give tax refunds when the final products are taxed at a lower rate than the rate on raw materials.

Some industries facing the brunt of the inverted duty structure are the fertilizer, pharmaceutical, textile, and footwear industries. For example, the raw materials used in the footwear industry are taxed at 12% or 18%. The final product is taxed at 5% in cases where the price of footwear is up to Rs.1,000. This leads to unrecovered credits for the manufacturer. 

The date for the GST Council meeting has not yet been fixed. But, it is expected to be announced soon.

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