Higher GST rate on mobiles, fabrics likely to boost revenue collection

Topics GST | input tax credit | GST rates

A registered taxpayer can claim refund of unclaimed input tax credit on account of higher tax on input and lower tax on output
The goods and services tax (GST) rate on mobile phones and fabric may be hiked by the GST Council next week. This could be part of an exercise to correct the inverted tax structure and boost revenue collection.

The structure of higher tax rates on inputs than on final products is resulting in a huge input tax credit outgo. Other items which have seen an inverted duty structure include fabric bags, shoes, tractors etc. 

The GST rate on mobile phones is 12 per cent, whereas that on phone parts and batteries is 18 per cent, triggering an inverted tax structure. That, in turn, leads to unutilised input tax credit and hence issuance of refunds by the government.  

In case of phones, a single manufacturer last year claimed a refund of close to Rs 4,100 crore. Pointing out that the issue of inverted tax structure is resulting in huge refunds outgo, a government official said that mobile phones and fabric could see GST rate rectification. 

A registered taxpayer can claim refund of unclaimed input tax credit on account of higher tax on input and lower tax on output.

Similarly, fabric has a GST rate of 5 per cent, whereas different types of yarns are taxed at 12 per cent. Initially, the government had not allowed fabric manufacturers to claim input tax credit refunds, but later allowed refunds in the July 2018 meeting. 

“Input tax credit refunds should not have been allowed on fabric in the first place. It was a political call taken at that time. It should be addressed now,” said another official. 

The GST rate on fabric will likely be hiked to 12 per cent from 5 per cent to correct the inverted tax structure, if all state finance ministers agree. In fact, a sub-committee of officers from the Centre and some states has been constituted to compile a list of items where there’s an inverted tax structure. 

As for shoes, those priced under Rs 1,000 are taxed at 5 per cent, while the rate of non-woven fabric and leather is 12 per cent. Tractor parts are taxed at 28 per cent, and tractor at 12 per cent. 

M S Mani, partner, Deloitte India, said it was necessary to correct the inverted duty structures in certain sectors on account of multiple rate changes over the past two years. Changes in output rates were not always calibrated with the input rates, he said. 

Pratik Jain, partner PwC India, however, argued that increasing the rate on end product may not be a desirable option to resolve the problem of inverted duty structure in most cases, as items have been kept in the 5 per cent and 12 per cent bands in view of their importance and impact on common man. 

"Allowing the refund of GST paid on input services (as of now refund is restricted to inputs) is an option which should be explored, in addition to bringing down the rates on inputs, if possible."

To meet GST shortfall of states, the Centre has sought suggestions for revenue augmentation including areas where inverted tax structure could be corrected and taken up by the Council.

The Centre’s proposal to augment revenue includes raising the 5 per cent slab to anywhere between 6 and 8 per cent, and doing away with the 12 per cent slab. However, it has found few takers among states as it will have an adverse impact on mass consumption products. Increasing the GST rate on certain items in the 5 per cent band to 12 per cent, and those in 12 per cent to 18 per cent is another option being discussed.

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