JUNE 01,2020

By Dr Shrikant Kamat,  Advocate & Counsel

"Be the change that you wish to see in the world"... Mahatma Gandhi

WELL, there can be no better time to remember this famous Gandhian quote than now, when the entire world economy has been brought down on its knees in the past 3 months by the Covid-19 pandemic. India's economy too hasn't been insulated from this viral shock. Industry virtually came to a standstill in the first month of the nationwide lockdown while it is barely moving at the end of the second month. Some of the sectors are suffering more than the others. Job losses, loan defaults, shut downs, migration of labour, etc. is happening by the millions in India. Yet, this is not the time to feel despondent and depressed. If the economy has to be revived and consumers have to be brought back to the market, someone with supreme authority will have to show the way. While the Government of India has tried to do its bit by announcing multiple tranches of economic stimuli, it is another constitutional body that can do wonders to dispel the gloom, if it wishes to. That constitutional body is none other than our ubiquitous Goods & Services Tax (GST) Council.

It has been almost 3 months since the GST Council was last convened. The 39th meeting of the Council was held on 14th March, 2020, just when the nation was getting ready to go into a prolonged lockdown. At that point in time, there were barely about 100 cases in India of Covid 19 infected patients. The number, as on today stands at close to 2 lakh cases. To quote a cliché, 'a lot of water has flown down the bridge between then and now'. Given the current state of the economy and depression of demand and supply, it was expected of the Council to come out with its own proposals to revive the economy and tax buoyancy, notwithstanding the multiple tranches of the stimulus package announced by the Union Finance Minister in mid-May. Yet, it is surprising, if not disappointing, that the Council has finally chosen to meet only now, in middle of June, and not earlier, through video conferencing, which is the new normal for conducting office work including attending office meetings, across the world. It is not the case that the Council hasn't convened over video conferencing in its 3 year lifetime. In fact, over half a dozen of its meetings have been e-meetings (for the record, the 19th, 24th, 27th, 30th, 33rd, 34th and the 36th meetings of the GST Council were e-meetings) wherein, some important matters were discussed and resolutions were passed.

Nevertheless, it is hoped that the Council members approach this meeting with a fresh thought process instead of the same tug of war approach that has been witnessed thus far between the States and the Centre, so far as the key issues such as disbursement of compensation, rates of compensation cess, tax rates and exemptions are concerned. This time around, everything has changed since the Council last met. States, especially those with Governments from the political parties that are in the opposition benches in the national parliament, have reportedly expressed dissatisfaction over the nature and extent of the stimulus package announced by the FM. Hence, the GST Council offers all States to 'walk the talk' by introducing measures that address the woes of the industry as well as the consumers. GST, after all, is a consumer driven tax and hence the consumers' interests should always be addressed foremost by the council, in its meetings.

Readers may recall that this is not the first time that the GST Council has had to deliberate on how to address a natural calamity or a disaster. In fact, back in October 2018, the then Union Finance Minister had approved the constitution of a Group of Ministers (GoM) to examine the issue regarding 'Modalities for Revenue Mobilisation in case of Natural Calamities and Disasters'. This was in response to the proposal by the State of Kerala for imposition of Cess on SGST for rehabilitation and flood affected works. It is pertinent to note that Article 279A(4)(f) of the Constitution empowers the GST Council to levy a special tax in the wake of any disaster. Kerala had then asked for either an all-India cess on some select luxury/sin goods or a cess on just SGST. The GoM examined various aspects of the "unprecedented" move to aid the state, which had suffered the worst disaster in a century, of non-stop rainfall for many weeks in August 2018. A special rate of SGST (State Goods and Services Tax) to mobilise additional revenue in case of natural calamity or disaster was agreed by the GoM, then. Among others, following resolution was passed by the Council in its 32 nd Meeting:

The Council might consider allowing levy of a cess on intra-State supply of goods and services within the State of Kerala at a rate not exceeding 1% for a period not exceeding two years. ¹

Thus, a look at the recent past reveals that Council members unanimously had only one thing on their minds in the wake of a national disaster - mobilisation of revenue for the state. While India's economy was still sluggish, back in October 2018, it was nothing like the present times, in comparison, with GDP of every state in India expected to shrink anywhere between 8 - 15 percent, year on year in the Financial Year 2020-21. Hence, introducing a new cess/levy or increasing tax rates is only going to precipitate the current economic crisis and further shrink the economy, bringing the GST Council back to thinking on how to increase tax buoyancy for the next 6 - 9 months. Hence, a novel approach can only work in mobilisation of revenues and revival of the economy.

What then should be the approach of the GST Council this time on?

The Council should meet with the objective of addressing just three important points on its agenda -

- Revival of demand

- Putting more money in the hands of businesses and consumers; and

- Revival of some key industry sectors that have borne the brunt of the pandemic

Let us see how these objectives can be addressed by the Council and what will be achieved by addressing these.

Demand Revival

Demand can be revived among consumers in many ways. Chiefly among these would be by -

- reducing tax rate on goods and services of mass consumption for a temporary period of 3 - 6 months

- increasing the threshold limit for registration and payment of GST for micro and small businesses for the current financial year (FY)

- increasing the turnover limit for availing respective composition schemes for suppliers of goods and for suppliers of services (or mixed suppliers)

Reduction of tax rates: Let us first understand how reduction of tax rate will revive the demand in the economy. As we all know, the current grim scenario as well as depletion of income all around will prompt people to conserve cash rather than spending it. The consumer will try to postpone his purchase by a few months unless it is essential. The centre, as well as all the states, are bound to lose substantial tax revenue if this tendency prevails among the general public for a longer duration. The GST collections for April and May 2020 put together may not have touched INR 1 lakh crore, which was the new normal for monthly GST collections until March 2020. Under such circumstances, if tax rates of essential goods and services drop drastically, albeit for a limited period, consumers would certainly rethink and make a beeline to the stores to buy goods that they would have otherwise purchased after a few months. Many consumer durables, electronic goods and appliances, food products and hygiene products currently attract 18 percent GST. It would be prudent for the Council to reduce the rates of these goods temporarily to 5 percent. Even some goods falling in the 28 percent category should be brought into the 18 percent or 12 percent fold for 3 - 6 months to revive the demand. If this is not done, the sluggishness in demand is likely to spread to even essential goods and services.

Increase exemption threshold limit: Threshold limit for all suppliers of goods and services should be increased to INR I Crore for FY 2020-21. This may be kept at 60 lakhs for North Eastern and Special States. This will free many businesses from the clutches of cumbersome GST compliances and additional cost on account of these compliances. This could also bring buoyancy in small businesses in the current year. They are bound to record more sales than otherwise expected in the current times. Once these businesses gross almost a crore worth of sales in the current year, these can be brought into the tax net in the next financial year but atleast the economy will see more sales and purchases and businesses will be able to survive this year without more pain on account of taxation and tax compliance.

Increase composition threshold: Composition scheme should be made available for suppliers of services (or mixed suppliers) with a tax rate of 4% (2% CGST + 2% SGST) having an annual turnover in preceding financial year upto INR 1 crore. The limit of annual turnover in the preceding financial year for availing composition scheme for goods should be increased to INR 2 crore. Special category states should be permitted to decide about the composition limit in their respective states. Again, the increase in threshold limit for availing the composition scheme and reduction in composition rates will incentivise many small businesses to opt for the hassle free composition scheme and thus focus on increasing their sales revenue.

Putting more money in the hands of MSMEs

Every person, from the small businessman to the large industrialist, from the consumer to the government authorities are short of cash in the current times of lockdowns and curtailed work hours. Ask anyone on the street or in the corridors of power about the one thing that government must do to revive the economy and you'll quickly find a chorus of voices saying, "put more money in the hands of the public". Well, the GST Council may not be able to put money directly in the hands of the consumer but it can certainly make available more working capital to small businesses by tweaking some minor provisions of the GST law. These are summarily mentioned below for want of space:

- Automatic refund by way of electronic fund transfer, of 90 percent of amount claimed, to the account of the claimant, within 2 working days from electronic filing of complete claim for refund of input tax credit or GST paid on exported goods or services;

- Re-opening the window of input tax credit for some sectors such as Restaurants with an option to pay output tax at 12 percent with ITC (instead of 5 percent without ITC)

- Suspending upto 31 st March 2021, the prohibition of ITC on following goods and services -

- supply of goods or services or both in respect of food and beverages and/or outdoor catering,

- inputs and input services going into  construction of an immovable property (other than plant and machinery);

- life insurance and health insurance premium paid by the employer for its employees

- Suspending TCS provisions applicable to e-commerce operators until 31 st March 2021 - this will release more working capital to small suppliers

- Exemption on services provided by banks and financial institutions by way of guaranteeing loans taken by businesses in FY 2020-21 with a total sales turnover not exceeding INR 100 Crores in FY 2019-20;

- Temporary exemption until 31st March 2021, from reverse charge payment on services & goods received from unregistered persons;

- Reduce GST rate on renting of immovable property to 5 percent upto 31st March 2021

The above measures will certainly improve the cash flows and working capital of all small and medium businesses and few large businesses too.

Government's Power to exempt goods and services on recommendation of the GST Council

Needless to mention, the Central Government and Governments of respective states have the power under the respective GST legislations to temporarily exempt, either fully or partially, any goods or services, from the levy of GST.

Section 11 of the CGST Act (and similarly worded provisions of the State or Union Territory GST legislations) empowers the Government to exempt any goods or services from GST levy provided that the GST Council expressly recommends to do so. The relevant provisions of Section 11 are cited below -

"(1) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.

(2) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by special order in each case,  under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax any goods or services or both on which tax is leviable."

Revival of key industry sectors

It is anybody's guess that the following industry sectors have borne the maximum brunt of the lockdown and closure in the past 3 months and could see a further turmoil atleast upto end-September 2020, if not further in time. These sectors are - Automotive, Aviation, Cab Operators & Cab Aggregators, Cinema Exhibition & Entertainment Centres, Travel & Tour Operators, Hospitality, Health & Fitness, Real Estate and Restaurants. The economic package announced by the Union Finance Minister may not provide companies in these sectors with any substantial relief. There are many thousands of businesses in these sectors which are staring at closure in the immediate future unless something effective is done and done soon. Hence, the GST Council can certainly take up their cause and provide them with some succour in the following manner -

- Automotive -

- No increase in the compensation cess rate on any passenger car segment,

- reduce GST rates on small cars to encourage consumers to travel in their own vehicles;

- allow all businesses to avail ITC on motor vehicles purchased between 1 st July 2020 to 31 st March, 2021 provided no depreciation is claimed under the income tax provisions on such ITC availed

- Aviation - Air travel in economy class may be put in a special 2 percent bracket upto 31st March, 2021 with ITC of input services and business class air travel may be put into the 5% category with ITC of input services;

- Cab operators & Cab Aggregators -

- GST rate for rent-a-cab and cab aggregator's service should be reduced to 12 percent;

- Full ITC should be allowed for a period between 1st July 2020 to 31st March 2021 on rent-a-cab services availed by companies for their employees;

- Travel & Tour Operators - Make ITC available to companies  that extend travel benefits to their employees on vacation such as leave or home travel concession between 1st July 2020 to 31st March 2021;

- Movie & Cinema Exhibition - GST rate on cinema tickets above Rs. 100 should be reduced from 18 percent to 12 percent and on cinema tickets upto Rs. 100 from 12 percent to 5 percent;

- Horse Racing - Racing season was suspended in early March across India due to fear of the spread of the Covid-19 pandemic. This has resulted in huge neglect of the race horses apart from job losses for trainers, handlers, etc. Many race courses have been partially taken over by the State Governments or Municipalities for setting up Covid Isolation Centres. In such a scenario, it is unlikely that the forthcoming racing season will witness any action. Therefore, levying 28 percent GST on the betting revenues and betting commissions is like telling the race organisers and punters, "if you don't have bread then eat cake", a la Marie Antoinette style. Hence, it is apt that GST rate is reduced to 18 percent and the tax is levied only on the commission earned by the clubs and not the prize money. These measures should be in place atleast upto 30th September 2021, given the severity with which the pandemic has hit this sector.

- Hospitality, Health & Fitness -

- GST rate for Hotels with room tariff above INR 5000 should be brought down to 12 percent while room tariff between INR 1001 to INR 5000 should be brought down to 5 percent;

- Reduce temporarily, upto 31st March 2021, the GST rate on health and fitness services to 5 percent and extend ITC to companies on membership of a club, health and fitness centre, which is currently in the prohibited list of services under Section 17(5) of the CGST Act, 2017;

- Real Estate -

- Construction services for residential properties falling in categories other than affordable housing should be extended a helpline by way of reduction in tax rate to 3 percent without ITC or 5 percent with full ITC on purchases made between 1st July 2020 to 31st March, 2022 for all new as well as ongoing projects;

- Tax rate on renting of immovable property must be temporarily reduced to 12 percent from 1st July 2020 upto 30th September 2021.

- Restaurants - Restaurants should be offered the option to choose between the current 5 percent GST rate without ITC or pay 12 percent with full ITC on purchase of goods and services

Timing is a precious virtue in tackling any crisis and not all is lost yet, in the race against time. The GST Council can unanimously decide on the exemptions, rate reductions and availability on input tax credit measures proposed above. It is really hoped that every member of the GST Council gives a serious thought to these measures as this is one opportunity that the Central Government and all States have got to demonstrate to the people and industry in India that the Government is really with the people in their fight against the dreaded Corona Virus. This will ensure "Jaan Bhi, Jahan Bhi" in the true sense.

[The author is Founder & Proprietor - Shrikant Kamat & Associates & the views expressed are strictly personal.]

¹Para 34.2, Page 42 of the Minutes of the 32 nd Meeting of the GST Council