Sanjay Kumar Agarwal, Chairman of the Central Board of Indirect Taxes and Customs (CBIC), said the new GST rates effective from September 22 will simplify the tax structure by reducing multiple slabs to two main rates at 5% and 18%, with 40% only for select sin and luxury goods. He explained that this move will “provide certainty and predictability to the industry” by resolving long-standing classification disputes in sectors such as food and automobiles.
He explained that e-commerce delivery services will also see clarity. Local delivery services, including food and grocery, provided through e-commerce operators will attract 18%. The liability will shift to the e-commerce operator once the law is amended, he said.
On medicines, Agarwal mentioned that while life-saving drugs are exempt or at 5%, raw materials remain at 18%, leading to an inverted duty structure. To ease pressure, he said that 90% of the claimed refund amount can be provisionally sanctioned within seven days based on system-based risk evaluation.
These are edited excerpts of the interview.
Q: When we talk about the two key rates, they will soon be a reality from September 22. A key question that comes from the industry is, what happens to the existing stock? How will they exhaust the ITC and the backlog on these existing stocks?
A: These new rates will be effective from September 22, except for a few commodities like pan masala, tobacco and cigarettes. As far as existing stocks are concerned, the rate applicable will be on the date of supply. So, these are the provisions under the GST law. So, if something is supplied from September 22 onwards, the new rates will apply.
Q: So, when we talk about the key rates, 5%, 18% and 40%, what was the rationale for coming down to these three rates only, with two main rates and 40% only for the limited items?
A: The basic idea was that this time we have to carry out a comprehensive exercise, because GST is already eight years old, and therefore there was a need for redoing the rates and bringing down the number of rates. If we have multiple rates, then that leads to classification disputes, and if similar types of goods are classifiable under two different headings, which may be attracting two different rates, that leads to classification disputes. And there are unforeseen demands which have been raised.
Especially when we analysed the food sector and automobile sector, we found that in a large number of cases, on food items, there were classification disputes, and that was leading to unnecessary demands on the sector, as well as on the automobile side. Also, auto components used to attract 18% or 28%, and these disputes were ongoing. Therefore, it was decided to bring uniformity in the rate.
And on all food items now the rate is 5%, whereas on all auto components, the rate is now 18%. This will provide certainty and predictability to the industry, and there will not be any unforeseen demands. While determining what the rates should be, 18% is the main standard rate, and it was decided to do away with the 12% rate and move the items under 12% either to 5% or to 18%. So, the majority of the items which were placed in 12% were already like merit goods. So most of the items have moved to 5% and a few items have moved to 18%.
Similarly, there were items under the 28% bracket, which were there because at the time of fixing these rates in 2017, revenue neutrality was the concept in mind. So, the excise duty and the VAT that the goods were attracting were the determining factors for the levy or fixing the rate on the goods. But goods should be, according to their nature, under some other rate. So, this time, this exercise has been carried out, and items which were falling under 28% have been brought down to 18%, which is the standard rate, barring a few items which are like sin goods or ultra-luxury goods.
Q: When we talk about services, a key change that was discussed in the council, what we heard was for e-commerce operators on local deliveries, including food delivery. In the past, we saw a lot of cases coming up where e-commerce operators were required to pay 18% GST, whereas e-commerce operators said that the delivery was being carried out by the delivery operator. There was a delivery partner, and if he was under the threshold, then he might not pay GST. What is the clarity that the council discussed on this?
A: Now it has been decided that the delivery services, which are provided through e-commerce operators, would be notified under Section 9(5), and once it is notified under 9(5), the liability gets shifted to the e-commerce operator. But this will require an amendment to the law, so it will take some time. But now there is certainty that local delivery services will attract the rate of 18%, which is the standard rate.
Q: And this is without ITC?
A: No, it will be with ITC.
Q: And when we talk about the levy being shifted from delivery partners to the e-commerce operators, it includes food delivery, local grocery delivery, everything?
A: It includes all types of local deliveries, which are provided through e-commerce operators.
Q: When we talk about medicines, a lot of key medicines have been shifted to 5%, and in some cases, rare diseases and life-saving drugs, like cancer drugs, have come down to exempt. But APIs, the key raw material, are still at 18%. That is causing a lot of inversion for the pharma sector. What could be the way out of this inversion?
A: It is not possible to correct the inversion in all types of cases, because there are items which belong to the chemical industry, and when they are consumed in the pharma industry, then inversion may happen. But just because inversion is happening, we should not keep the rates high.
Medicines deserve to be placed in the 5% rate. Accordingly, medicines have been placed at the 5% rate. And because of inversion, if there is any accumulation of credit, ITC can be refunded. In that case, also, in the process of reform, the government and GST Council have recommended an amendment in the law so that 90% of the claimed amount can be provisionally sanctioned within seven days based on identification and risk evaluation by the system. That will lead to faster refunds in case of an inverted duty structure.
Since it requires an amendment in law, which may take some time, the Honourable Finance Minister has instructed CBIC to issue instructions to the field formations that, pending the amendment, the difference in these cases may also be disposed of in the same line as in the case of zero-rated supply refunds.
Q: When we talk about textiles, a similar matter, polypropylene is at 18% but the yarn, which is made, that is the polyester yarn, is consumed by almost all sectors, be it apparel, Meditech, etc. Again, they are having this issue. Will they also get clarified under this process of inversion?
A: In the case of textiles, the inversion was occurring at the stage of fabrics. Fabrics attract a 5% rate of duty, whereas the fibre and filaments attract a higher rate of duty. So, because of that inversion, the inverted duty difference claims were to be filed by the weavers, and they are mostly in the MSME sector. We analysed the data and found that almost 44,000 claims were being filed because of the inverted duty structure. But now the inversion stage has been moved back, and it is happening when the products of the petrochemical industry are entering the textile segment.
So, inversion is happening at that stage. And at that stage, there are a few industries. Around 400 industries are there. They are in the organised sector. It is easier for them to claim the inverted duty refund. And as I mentioned, now in process reform, we are bringing a provision in the act itself to provide a 90% refund amount on a provisional basis, in the case of taxpayers where we have done the due diligence, and it can be given on a provisional basis.
Q: When we talk about these rates, it brings cheer to the common man and to the industry with reduced rates. As you said, all food items are at 5% and standard items are at 18%. A key concern from the consumer point of view is, how will these rates be passed down? For example, a biscuit was attracting 18%, but it is now at 5%. The gap of 13% in a ₹10 pack might not mean more than just a 50 paisa decline in the MRP, and that becomes a pricing issue for the manufacturer as well, because either he changes the price or he increases the grammage of the product that is being sold. In that case, it becomes a little bit of a difficulty for the industry to either change the pricing or to increase by a very limited, one or two grams more. How will the consumer get the actual benefit? Also, we don’t have any anti-profiteering clause anymore, as that has had a sunset. How will you ensure that the customers’ rights are protected, and also give a clear window to the industry to pass on this benefit?
A: Our experience is that in most cases, the industry passes on the benefit whenever there is a rate cut. And this rate cut exercise earlier was carried out in 2017, 2018 and 2019 also. At that time, there were anti-profiteering provisions under the GST law. But our experience shows that there were not too many cases filed under that law, and the amount involved was something like ₹3,000-4,000 crore. So that was not a significant amount. This shows that in most cases, the industry passes on the benefit to the end consumers. And in many industry segments, they have already mentioned that in case there is a rate cut, they will pass on the benefit to the end consumers.
