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TMI BlogMinutes of the 4th GST Council Meeting held on 3-4 November 2016X X X X Extracts X X X X X X X X Extracts X X X X ..... Presentation by the Goods and Service Tax Network (GSTN) on the status of development of GST Portal, Data migration/Enrolment plan, Risk factors and mitigation plan. 3. Finalisation of the bands of tax rates under GST regime (Outstanding agenda item from the 3rd GST Council Meeting held on 18-19 October 2016). 4. Provision for Cross-Empowerment to ensure Single Interface under GST (Outstanding agenda item from the 3rd GST Council Meeting). 5. Date of the next meeting of the GST Council. 6. Any other agenda item with the permission of the Chairperson. Discussion on Agenda Items Agenda Item 1: Confirmation of the Minutes of the 3rd GST Council Meeting held on 18-19 October 2016 4. The members suggested the following amendments to the draft minutes of the 3rd meeting of the Councili. i. The Hon'ble Minister from Maharashtra stated that the existing paragraph 10 of the minutes should be replaced by the following- 'The Hon'ble Minister from Maharashtra stated that apart from ₹ 7,000 crores that his State stood to lose due to subsuming octroi in GST, they would also lose another ₹ 7,000 crores due to removal of Local Body Tax from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Minister from Kamataka stated that, on the lines of the Hon'ble Union Finance Minister's argument that compensating for the loss arising out of reduction of CST would not be as per the Constitutional mandate as enshrined in the Constitutional Amendment, even compensating on the basis of a flat projected revenue growth rate of 14% went against the Constitutional mandate. It did not really compensate the States that have witnessed average revenue growth of more than 14% in past five years, from the loss of revenue due to introduction of GST. He argued that the States should be compensated in accordance with their past revenue performance to honour the spirit of the Constitutional provision. It was agreed to by the Council to add the Hon'ble Minister's version suitably in paragraph 31 or 32 of the draft Minutes with the formulation as proposed above. iv. The Hon'ble Minister from Odisha suggested to add in paragraph 34 of the minutes that if the issue regarding the validity of Entry Tax presently being heard by the Hon'ble Supreme Court was decided in favour of the States even at a later date, the revenue accruing on this account should be added to the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t apart from ₹ 7,000 crores that his State stood to lose due to subsuming octroi in GST, they would also lose another ₹ 7,000 crores due to removal of Local Body Tax from 1 sl August 2015 at the instance of the Hon'ble Prime Minister of India. The action was in consonance with GST. As the State compensated the revenue to the Local bodies, the amount of compensation paid should be considered for the purpose of revenue collected by the State for year 2015-16. Similarly, his State stood to lose ₹ 700 crores due to abolition of Sugarcane Purchase Tax. He stated that his State should not suffer any loss on this count and taxes on account of octroi, Local Body Tax and Sugarcane Purchase Tax should be included in the definition of revenue.' ii. To replace the version of the Hon'ble Minister of Rajasthan recorded in paragraph 44 of the draft Minutes with the following: 'The Hon'ble Minister from Rajasthan mentioned that levy of cess for purposes of compensation was not desirable; instead he felt that a separate higher rate of tax of more than 50% should be imposed on demerit goods. He further observed that in Rajasthan, Bidi was taxed at 65%, Cigare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a provision that letters written to GST Council should not go in the public domain. Agenda Item 2: Presentation by the Goods and Service Tax Network (GSTN) on the status of development of GST Portal, Data migrationlEnrolment plan, Risk factors and mitigation plan 7. On this agenda item, a presentation was made by Shri Navin Kumar, Chairman, GSTN along with Shri Prakash Kumar, Chief Executive Officer (CEO), GSTN. The presentation broadly covered the status of development of the Information Technology (IT) systems for GST, provided an update on data migration/enrolment and on risk factors and mitigation plan. As regards the IT system, it was informed that MIS Infosys Technologies was selected as the Managed Service Provider (MSP) for GSTN in September 2015 and their scope of work included application, design and development; one-time taxpayer data porting; IT infrastructure procurement, supply, installation and information security; Data Centre (DC) and Disaster Recovery (DR); Hosting Services; Helpdesk and Training. The presentation gave an update of the GST system rollout, which was proposed to be done in three phases. Phase 1 relates to Frontend Services under GST (like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R) and Near Data Recovery (NDR) will be located at Bengaluru. It was also clarified that the backend system was being developed for those States/Union Territories which opted for it and the group of 25 States is called Model-2 States. Originally only 12 States had opted for Model-2 but subsequently, 8 more States and 5 Union Territories joined it bringing the total to 25. The Hon'ble Minister from Tamil Nadu suggested that the helpdesk of GST should be operated in local languages as well. The Chairman, GSTN clarified that the helpdesk was being operated from a centralized location in Gurugram in English and Hindi and the States were to run their own helpdesk centres in regional languages. He also added that GSTN would assist the States by providing training materials and content for knowledge management (KM) tool, which the States could get translated into local languages. The Hon'ble Minister from Jammu Kashmir expressed that GST Helpdesk and the State run helpdesks could use common content while being located at two different places. The Secretary to the Council clarified that a centralized call centre would not be able to cope with the workload for the whole country an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion, the Hon'ble Chairperson observed that progress of development ofIT Systems for GST would be presented before the Council from time to time. Agenda Item 3: Finalisation of the bands of tax rates under GST regime (Outstanding agenda item from the 3rd GST Council Meeting) 10. Initiating the discussion, the Secretary to the Council briefly recapitulated the discussion on this issue in the 3rd GST Council Meeting on 18-19 October, 2016. He recapitulated the proposal to have a four rate GST structure and the rates could be 6%, 12%, 18% and 26%. He explained that a slab of 6% was needed for such goods where VAT was being charged at 5% and Central Excise duty on the same goods was Nil. He stated that if such goods put in the 12% rate band, it would adversely affect the poorer sections of the society. He noted that the highest slab of 26% was proposed for such goods which at present cumulatively attracted a duty of 27% (VAT 14.5% and Central Excise duty 12.5%) in addition to the cascading effect and the effect of the Central Sales Tax (CST). He also recalled the suggestion to have a cess to meet the compensation requirement of the States. He clarified that if the est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax credit. He also pointed out that for compensation, a growth rate of 14% had been assumed and overall tax collection might grow at a lower rate. He also pointed to the danger of higher rate of tax leading to greater evasion as seen from the example of high duties of Customs on gold and cigarette making them the most highly smuggled goods. The Hon'ble Minister from Telangana observed that the tax rates should be such that it promoted compliance. He suggested that luxury goods like luxury cars should be taxed at a higher rate. 12. The Hon'ble Minister from Tamil Nadu recalled that earlier there was a concept of goods of local importance for each States and enquired whether this concept still held good. The Secretary to the Council stated that the list of exempted goods should be common for the country. The Hon'ble Minister from Kerala stated that the issue of compensation should not be mixed with the rate structure. He suggested that the rate structure should be decided first and the issue of compensation could be taken up thereafter. He added that keeping in view the three principles that the tax should be revenue neutral, inflation neutral and distribution neutra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a lot of concern at the proposal to tax gold at 4% and he suggested that it should be reduced to 2%. The Hon'ble Minister from Bihar suggested that the higher rate of tax should be kept at 30% and luxury items should be taxed at 40%. The Hon'ble Chairperson stated that if evasion could be checked by having moderate rates of GST, this would also positively impact Direct Tax collection as more transactions would get accounted in the books of account. 15. The Hon'ble Deputy Chief Minister of Gujarat suggested to keep tax on diamonds at the rate of 0%, keeping in view the fact that it accounted for export turnover of ₹ 2 lakh crore, provided employment to a large number of people in the diamond cutting and polishing industry and was an environment friendly activity. He also supported a low rate of tax on gold as it was also used by the poorer sections of the society. The Hon'ble Minister from Maharashtra also supported Gujarat's proposal in respect of diamond and gold. He broadly supported the proposed bands of rates but suggested that there should be a separate category of luxury goods and sin goods like tobacco should be charged to tax at 60% and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, it would put additional burden on one or the other segment of the society. He therefore supported the idea of delinking compensation from the slab rates. He also observed that all goods presently in the slab of 26% could not be moved to the slab of 40% and creation of one more slab would cause loss of public support. He also agreed with the observation of the Hon'ble Minister from Jammu Kashmir that if Centre's finances were squeezed, it could adversely affect funding of the Centrally Sponsored Schemes. He also suggested that cess could be continued beyond five years and its proceeds could be shared between the Centre and the States and that this could solve multiple challenges. The Hon'ble Chairperson observed that while some developed countries had two rates in GST other than the exempt category, several other developed countries had multiple rate structure. He observed that in the Indian context, a two band rate would lead to either a steep increase or a sharp reduction in the tax incidence, and both were not desirable. 17. The Hon'ble Minister from Kerala stated that he strongly objected to lowering tax rate on goods which were currently at higher rates. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the States. He added that the Centre would retain an amount of₹ 10,395 crores after devolution. He stated that this would be more equitable as the higher rate slab would apply on the wealthier sections of the society and the compensation kitty would be reduced because of taxes going to States. He further observed that presently, the combined rate of tax on normal cars was 38.5% (41.81% with cascading), for luxury cars was 41.5% (44.81% with cascading) and for aerated drinks was 39% (with cascading effect). He suggested to have a rate of 40% tax on luxury cars and aerated drinks. Summing up his proposal, he said that there should be five rates of 0% for food grains, 5%, 12%, 18%, 28% and 40% and the officers should fit the goods into the slabs of 12% and 18% taking into account the inflationary impact. He observed that some logical adjustments could also be done for goods falling in the slab of 28%. He stated that after the officers had carried out this exercise, it should be brought back to the Council for consideration. On gold and diamond, he stated that a view could be taken later on. He further observed that the average combined rate of tax on tobacco was in the ran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could entirely go for compensation, if it was levied as cess. On tobacco products the combined average tax rate was 65% (VAT 25%-30% and Central Excise 30%-35%) and the revenue collected by the Central Government from tobacco in 2015-16 was around ₹ 20,000 crores. A cess on tobacco and tobacco products at the rate of 37% (taking the GST rate at 28%) is expected to yield revenue of around ₹ 18,000 crores. The total yield for compensation from the four items, namely aerated drinks, pan masala, luxury cars and tobacco products plus the amount expected from the Clean Environment Cess would be around ₹ 55,000 crores. He further added that cess would be a part of the compensation law and a sunset clause could be introduced there. This would enable the Council to have a fresh look in regard to tax rate on these four commodities after the five year sunset period. He added that an additional slab of 40% would be open to public criticism. He also reminded that cess was to be raised only for a few States who needed compensation and any residual amount after five years would be shared with the States. He added that the Council could take a decision based on the facts as pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould stand to gain .. The Hon'ble Chairperson stated that many goods presently in the tax bracket of 26%-28% like soap, oil, television, cheaper mobile sets etc. were used by common people and a choice would have be to be made whether duty on such goods or on gold should be reduced. He observed that another option regarding gold was to reduce duty of customs on gold on which the Government ofIndia would take a view separately. He further suggested that after observing the experience of the first year, the Council could revisit the rate of tax on gold in the next year. The Chief Economic Advisor observed that it was important to take note that the incidence of tax on the luxury and demerit goods was not proposed to be brought down, though the optics was a different issue. He added that if the highest GST rate was kept at 28%, this could be looked upon as the demerit rate. However, if a 40% rate slab was kept, this would be the demerit rate and 28% would appear to be the standard rate which would look as a very high GST rate regime. 22. The Hon'ble Minister from Jammu Kashmir observed that no category of goods should be exempt and pandering to cultural sensitivities of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded that the rate of tax on gold could be kept open till the completion of the fitment exercise of goods into bands of 12% and 18% by the officers and reporting back to the Council. 24. In reference to the summing up by the Hon'ble Chairperson, the Hon'ble Minister from West Bengal suggested that the GST rate of 40% could be kept for luxury cars, pan masala and aerated drinks and for tobacco, there could be a GST rate of 40% plus cess. He observed that by this rate structure, all States would get revenue and Centre would also get revenue for compensation. He advised not to be too sensitive about the world opinion as they were democratically elected representatives by the people of India, and in any case, India was a very attractive market. The Hon'ble Chairperson stated that any excess amount from the compensation kitty would be distributed between the States. He added that if at the end of the first year of the GST rollout, amount was found to be spare in the compensation fund, the incidence of cess could be reduced the next year and if there was a shortfall, the incidence of cess could be increased. The Hon'ble Minister from West Bengal reiterated the demand f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged the Hon'ble Chairperson to agree to his suggestion in a spirit of cooperative federalism. 26. The Hon'ble Minister from Jammu Kashmir observed that as States were insulated for the next five years with an assured 14% revenue growth, this issue need not be discussed much. The Hon'ble Minister from Tamil Nadu stated that they did not want dependency on compensation as they had to survive on their own after five years. The Hon'ble Minister from Odisha and Tamil Nadu also supported the proposal of keeping a GST rate slab of 40%. The Hon'ble Chairperson stated that if compensation was funded from GST, it would not lead to additional tax burden on people. The Hon'ble Minister from Jammu Kashmir disagreed and stated that it would constitute an additional burden as the incidence of taxation would have been lower without an additional cess. The Hon'ble Minister from West Bengal added that there was higher burden as no input tax credit was available on cess. The Hon'ble Minister from Punjab stated that the Central Government needed to have a cushion if compensation burden on the Centre went beyond ₹ 55,000 crores during the next year, which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collected by each State. The Hon'ble Minister from Puducherry stated that the sharing arrangement suggested should not be on the basis of the Finance Commission formula. 29. In view of the above discussions, for Agenda item 3, the Council adopted the following decisions in respect of bands of rates of tax in the GST regime and the compensation mechanism for five years: (i) There shall be a category of goods which shall be exempt from GST and this would include items like food grains. (ii) There shall be a low band of tax rate of 5% and would generally cover goods which presently attract combined tax rate of Central Excise and V AT (including cascading on account of these two taxes) between 3% and less than 9%. Such goods are normally consumed by the vulnerable sections of the society or have high impact on inflation. (iii) There shall be a standard tax rate of 12% and would generally cover goods which presently attract combined tax rate of Central Excise and VAT (including cascading on account of these two taxes) between 9% and less than 15%. (iv) There shall be another standard tax rate of 18% and would generally cover goods which presently attract combined tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd are not fixed rules. While doing the fitment in the slab rates of 12% and 18%, the Committee of officers shall take into account the current economic and social realities. This Committee of officers shall also examine as to what items are presently attracting combined VAT and Central Excise tax rate of 28% or above and could be put into 18% rate slab taking into account the present context in which goods earlier considered as luxuries are now largely used by all segments of the society. The Committee shall bring the outcome of this exercise to the Council for further decision. (xv) The rate of tax on gold shall be decided by the Council after the completion of the fitment exercise as mentioned at serial number (xiv) above. Agenda Item 4: Provision for Cross-Empowerment to ensure Single Interface under GST (Outstanding agenda item from the 3rd GST Council Meeting) 30. This agenda item was taken up for discussion on 4 November, 2016. Initiating the discussion, the Secretary to the Council brought to the notice of the Members that the GSTN had earlier shared data of the existing taxpayers under VAT, Central Excise and Service tax as on 01.01.2016 and in the 3 rd GST C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated that the veracity regarding the number of taxpayers needed to be tested due to fundamental difference in the numbers presented by the Hon'bJe Minister from West Bengal and the Central administration. He therefore suggested that Option II should also remain on the table. The Hon'ble Minister from Andhra Pradesh supported Option II. He added that the cap of 5% audit suggested in Option N was acceptable and that the selection of 5% for audit should be done on a computerised basis. He added that all suppliers of services below ₹ 1.5 crore turnover should also be with the States and the issue of taxpayers paying composite tax on goods and services could be discussed further. He also suggested that IGST should be considered to be with the States for administration purpose. The Hon'ble Minister from UP recalled the decision of the Empowered Committee where it was decided that administration of taxpayers below the threshold of ₹ 1.5 crores should entirely be with the States. The Hon'ble Deputy Chief Minister from Delhi supported this suggestion and also added that audit should be capped at 5% and that the taxpayers for this should be selected on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of goods and services and the apprehensions of the small taxpayers, he suggested that for 3 years, Option III could be adopted with the modification that the three categories of taxpayers dealing both in goods and services, namely works contractors, restaurants and hotels could be administered by the State Governments. The Chairman CBEC stated that the Central Government's suggestion to adopt Option IV needed to be viewed in a broader context. He pointed out that registrations were to be done by G'S'TN and all registrations were deemed to be done within three working days and were sent to the respective States. Similarly payments were done on the G'S'I'N and it went to the . respective States. The GSrn also handled the front-end process for return including throwing up mismatches for the input tax credit claims. He emphasized that as the basic processes were taken care of by the GSTN, there was a move towards a system where the taxpayers need not know his administrator. He further pointed out that the areas of contact were limited to returns or mismatches and for this, administrations could proceed further by scrutiny or audit process. He further pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f taxpayers and the complexity involved was high and the CBEC had limited bandwidth. He emphasised the importance of co-location of taxpayer and the tax administration. The Hon'ble Chairperson stated that in goods, the threshold limit for payment of Central Excise duty was turnover of more that ₹ 1.5 crore, whereas the State tax administration was dealing with small retailers. In Service tax, the Central administration was dealing with all taxpayers above the turnover threshold of ₹ 10 lakhs, He stated that the formulation for single interface in the 1 st GST Council meeting was made keeping these realities into account. However, given the objections raised by the Hon'ble Minister from West Bengal and the problems of lack of distinction between goods and services for certain sectors like works contracts and restaurants, one option could be to consider the proposal made by the Hon'ble Minister from Chhattisgarh. He also shared the apprehensions expressed to him by large service tax taxpayers regarding the inadequate capacity of the State tax administrations in the area of service tax and their unease in getting their returns assessed by them. He suggested tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l meeting. The only issue left for decision was in respect of services and even if service providers below the turnover threshold of ₹ 1.5 crores were given to States, the Central Government would still have an additional number of taxpayers. The Hon'ble Chairperson observed that the observation might hold good for the quantum of tax, but not for the number of taxpayers. The Hon'ble Deputy Chief Minister of Delhi observed that in Delhi while the number of taxpayers below the turnover of ₹ 1.5 crore was 85%, they only accounted for 5% of revenue and that the 15% of taxpayers above the turnover of ₹ 1.5 crore accounted for 95% of revenue. The Hon'ble Minister from U.P. observed that even if registration of a taxpayer was automatic, co-location was important to ensure raising of demand where tax was not paid. The Hon'ble Minister from Telangana also supported the proposal to allow taxpayers below the turnover of₹ 1.5 crore to be administered by States. 38. There was a discussion on the number of taxpayer base. Shri Upender Gupta, Commissioner, GST, CBEC stated that the total PAN matched taxpayer base which would be migrated to GST was .aroun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at afresh. The Secretary to the Council stated that there was not much revenue loss by raising the threshold from ₹ 10 lakhs to ₹ 20 lakhs. He recalled the discussion of the I Council meeting of 22-23 September 2016 where the issue of exemption threshold was decided and then it was pointed out that the figures collected from the States indicated that more than 60% of the traders had a turnover of less than ₹ 25 lakhs annually, but they contributed to only 2% of the revenues, which resulted in a high cost of collection. Similarly in case of services, around 70% of taxpayers had a turnover of less than ₹ 25 lakhs annually and they contributed to less than 3% of the total service tax paid. The Hon'ble Minister from Karnataka also advised against revisiting the exemption threshold and pointed out that in his State, around 60% - 65% assessees fell within the bracket of a turnover of up to ₹ 20 lakhs and they accounted for only 1 % of the revenue. The Hon'ble Minister from U'P. stated that in his State, only 3% of revenue was accounted for by taxpayers upto a turnover of ₹ 20 lakhs. The Hon 'ble Minister from Telangana observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble Minister from Kerala stated that he was taken aback at the debate and wondered why a compromise could not be reached on this issue when the same could be reached on a more important issue of tax rates. He urged the Hon'ble Chairperson not to be influenced by the Central bureaucracy and to go by his earlier decision of accepting a horizontal division of taxpayers. The Hon'ble Chairperson observed that the horizontal division did not have adequacy of numbers in respect of both the administrations. He further observed that the States' bureaucracy was also making a lot of statements to influence the decision. He again emphasized the need to ensure adequacy of work for both the administrations. 42. There was a discussion regarding the data of taxpayers particularly the number of taxpayers and the tax amount that would go out of the tax net due to increase in the taxable threshold from ₹ 10 lakhs to ₹ 20 lakhs. The Hon'ble Minister from West Bengal stated that for goods, about 38 lakh taxpayers would go out of the tax net out of 67 lakhs taxpayers. On the services side, he stated that about 20 lakh taxpayers would go out of the tax net out of 28.5 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al once again strongly reiterated that based on the data shared by the Secretary to the Council, the proposed division of taxpayers was equitable on the basis of proportionality of the strength of the officers. The Hon'ble Deputy Chief Minister of Gujarat made an alternate suggestion that there should be no threshold ceiling of ₹ 1.5 crore and the taxpayers paying all three taxes could be divided in the ratio of two-third to the States and one-third to the Centre. The Hon'ble Minister from Kerala opposed this suggestion of vertical division. He observed that the Central tax administration did not have officers to reach tax payers at the taluka and the block level and the revenue paid by the taxpayers below ₹ 1.5 crore turnover was very small. The Hon'ble Minister from Telangana also supported this view and observed that the State officers were present in every nook and corner of the State and experienced officers could deal with large taxpayers. The Hon'ble Minister from Tamil Nadu also opposed the proposal of the Hon'ble Deputy Chief Minister of Gujarat and stated that this would lead to considerable loss of taxpayer base to the States. The Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion principle for goods was a firm decision of the 1st meeting of the Council and the demand was to apply this decision to services looking at the number of Service Tax taxpayers. The Hon'ble Minister from Iharkhand stated that the method of division on the basis of ₹ 1.5 crore turnover or a vertical two-third/one-third division looked the same. The Hon'ble Minister from Tamil Nadu stated that if taxpayer base was reducing by 42%, there was a need to look at the existing workforce and the possibility of redeploying one-third of the workforce of both the Central and the State tax administrations. However, subsequently he also observed that the entire taxpayer base might not shrink because dealers making inter-State supply would need to be registered irrespecti ve of the turnover threshold. 46. The Hon 'ble Minister from Chhattisgarh reiterated his proposal to go by the decision of the 1st meeting of the Council with the modification that the taxpayers in the sectors of hotel, restaurant and works contract should be with the States. The Hon 'ble Minister from Karnataka suggested to add Information Technology to this list as they also paid a big component of V ..... X X X X Extracts X X X X X X X X Extracts X X X X
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