GST Reforms a Collective Decision, So No Case for Compensation: CBIC Chairman

What happens is that whenever we undertake a reform exercise, we are normally constrained by keeping the exercise limited. In that process, real reform does not take place. If we impose too many restraints on ourselves, then reform cannot truly happen.

Fundamentally, when GST was introduced, items were placed at particular rates on the basis of the tax incidence on those items prior to GST—through central excise duty and VAT. That is why cement was taxed at 28%. But cement never really merited attracting 28%, since it is used in the construction sector. Other items like iron and steel, which also go into construction, were placed at 18%.

The philosophy at that time was to keep it revenue-neutral. But after eight years, if we conduct the exercise with the same mindset and constraints, then real reform cannot take place.

So, this time, that is the fundamental change which could result in a transformative reform. What was done was to address the fact that a lot of classification disputes were arising because of so many rate slabs—5%, 12%, 18%, and 28%.

For example, in the food sector, where the maximum disputes arose, items were either exempted or taxed at 5%, 12%, or 18%. This sector is constantly evolving, with new food products entering the market due to changes in manufacturing technology. These new products could be classified either by their common parlance or by their manufacturing process, leading to disputes, since classification is done as per the HSN code, which originates on the customs side. While some fine-tuning of classification is done there, in GST the same goods are spread across the tariff and attract different rates.

Therefore, the first thought was that we should reduce the number of tax rates. There should be a standard rate of 18%, and a merit rate for goods that deserve a lower rate because they are mass-consumption items. With that mindset, each item was examined and placed at an appropriate rate. Some goods, particularly luxury goods, have been placed at a special rate of 40%.

That is why this change in approach is fundamental. Real reform could not have happened if we had remained stuck in the earlier framework. For example, if cement was reduced from 28% to 18%, but kept at 20% to play safe, the reform would have been a non-starter. To make the reform effective, bold decisions were required. At some point after the introduction of GST, such a reform becomes necessary, and it requires strong leadership to provide the boldness to the revenue department to conduct the exercise. This way, real reform happens. It is not a reform in name only.

For placing each item, whether bringing it from a higher rate to a lower rate, or from a lower rate to a higher rate, everything was very carefully calculated in terms of revenue implications. The entire picture was presented, showing that if we were going for real reform, this would be its revenue impact.

Once we got the signal that we should pursue real reform and not a reform in name only, because such opportunities do not arise again and again, a proposal was made by the Centre. It was then sent to the GoM, which had been set up for the rate rationalisation exercise back in 2021. We did not find any opposition to this, and it was passed unanimously in the GST Council meeting, because each item had been carefully placed at the appropriate rate.

For example, in food items, where the maximum number of disputes were arising, all food products are now subject to a 5% rate. This means there will no longer be disputes, even under the residual entry—“if not elsewhere classified”—which has also been placed at 5%. So, in the food sector, disputes will not arise in the future either.

I will pose only one question. Are they supporting or not supporting? If they are supporting, then they are equal stakeholders. So it is not that only their revenue will take a hit; it is the Union revenue that takes an equal hit.

In case they felt their revenue should remain the same and they didn’t want to take any hit, they could have opposed the proposal, but they did not. Once we agreed to take a hit in the interest of the country, so that consumption levels go up, the economy grows, and new jobs are created, it became clear that nobody has been harmed. Therefore, the question of compensation does not arise.

Compensation is sought when someone is harmed. Here, nobody has harmed anyone. It was a conscious, collective decision: you are taking the hit, I am also taking the hit. If I hit you, then you can seek compensation. But if we are jointly party to the decision and no one is opposing rationalisation, then the issue of compensation simply does not arise.

I do not look at it from that angle. Whatever revenue implication figures are coming out in the media from different stakeholders, ultimately that money is going to be placed in the hands of consumers. Once it remains in the economy, it will be spent again, creating multiple cycles.

This will not only generate revenue but also increase consumption. When consumption goes up, economic activity increases, jobs are created, the economy grows, GDP grows. That is the way the country progresses. It stimulates growth.

The tax departments will be watching the price trend. In case we notice that, in a particular sector, rate cuts are not being passed on to the ultimate consumer, we will take up the issue with the industry bodies. There will be intervention if we find that some segment of the industry is not passing on the benefits.

And you know, once such things find traction, they cannot go unnoticed, because society today is so interconnected. If businesses don’t pass on the benefits to consumers, there will be a backlash against their businesses.

There are two issues: businesses not registering for payment of GST, and businesses that are registered but not discharging their liability on their entire turnover. The best way to address this is to make compliance simple.

For that, this reform package includes a simplified registration scheme, recommended by the GST Council and soon to be implemented. This will help retailers, small businesses that mostly issue B2C invoices to end consumers, with only a few B2B invoices in cases like returns to suppliers. Similarly, service providers such as fitness centres or beauty parlours, where the rate was earlier 18% and has now been cut to 5%, will also benefit. All these changes will nudge small businesses to take registration and comply.

Because, ultimately, it is better to make the process simple—easy registration, simple return filing, faster refunds—than to catch businesses later and raise demands.

A very important proposal, which has received in-principle approval from the GST Council, relates to e-commerce. Today, most businesses want to operate through e-commerce platforms. If they make supplies within the state, even below the exemption threshold, they can do so. But if they make inter-state supplies—for example, from Madhya Pradesh to Gujarat—they are required to register, even if they are very small businesses.

There is no problem if they are willing to take registration. But suppose their goods are stored in Gujarat by the e-commerce operator for supplies within Gujarat. At present, they need to set up an office in Gujarat to obtain registration, which small businesses cannot afford. Now, the Council has given in-principle approval to create a simplified registration process for such businesses selling through e-commerce operators in other states. The modalities will be worked out, and once launched, it will be a very big booster for small businesses.

The ITC (input tax credit) taken on compensation cess can be utilized only for the payment of compensation cess. If there is no compensation cess from 22nd September onwards, the balance will simply remain lying in the books. It cannot be utilized.

This is not the only time such a situation has arisen. In the past also, whenever any levy was abolished, the credits lying in the books remained there.

You see, customs tariffs are basically not levied for the purpose of revenue collection. Of course, they do generate revenue, but the main idea is to provide protection against the disabilities faced by businesses in a particular region. For example, interest costs may be higher in India, or land and electricity costs may be higher for setting up a business. These are the disabilities. To provide industry with a level playing field and to counter these disadvantages, customs tariffs are prescribed. That is the main purpose. Revenue presently is not the purpose.

I can’t say about the past, but presently that is not the approach. I don’t know what the thinking was earlier, but today it is different. If, in the interest of the country, duties have to be lowered, we don’t go by how much the revenue implication will be.

We should not increase tariffs unnecessarily, because tariffs have to be calibrated very finely. If we increase them more than required, it brings inefficiencies in domestic industry. Then our industries cannot compete in the international market, and they will not be in a position to export.

So, tariffs should be calibrated as per the needs of industry. Our focus should be on addressing the cost disadvantages faced by industry compared to other countries, rather than keeping tariffs high.

For example, if industrial land is to be provided for setting up industries, it should be used for that purpose only, not for making money through resale. The purpose is to facilitate the setting up of industry, and it should remain so.