More GST rate changes that may address reverse duties and exemptions

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The Goods and Services Tax (GST) Board may make another round of rate changes to correct the remaining instances of reverse duty, in addition to removing other exemptions. A Group of Ministers (GoM) led by Karnataka Chief Minister Basavaraj Bommai is working on the second round, people familiar with the matter have told ET.

“The inverted rights correction exercise is not yet complete and there is still work to be done,” a senior official said, adding that the GoM is working on the next list and a proposal could be presented before the next meeting of the council, which is probably in September. . “The last two or three meetings have been productive, many important decisions have been made. But some points are still pending, including textiles,” the person said.

Reverse service structures

Reverse duty refers to structures where the tax rate on inputs is higher than the tax rate on overseas deliveries, discouraging value addition. If necessary, tax authorities will engage with industry for feedback, the official said.

According to experts, reverse duty structures are also prevalent in automobiles, including electric vehicles, some electronics, urea and other fertilizer inputs.

“Correcting the reverse duty structure in sectors such as textiles, electric vehicles, etc., would help the industry liquidate accumulated credits, alleviate working capital issues and reduce compliances,” said said Saurabh Agarwal, EY tax partner.

Resolving inverted duty structures in sectors where Production Linked Incentive (PLI) programs have been introduced will help improve the internal rate of return. Currently, companies in these sectors are not able to use the input tax paid on the purchase of capital goods; they are also unable to obtain reimbursements in this regard, which leads to increased working capital costs, Agarwal said.

In September last year, the GST Board decided to rectify the reverse tariff structure for footwear and textiles. Duties on shoes and finished garments of any value were set at 12%, effective January 1. Previously, the rate of GST was 5% for the sale value up to Rs 1,000 per piece in the case of finished garments such as shirts, and per pair in the case of shoes.

Traders and manufacturers have opposed the increase, saying it will negatively impact India’s textile industry and lead to job losses. Many states – including Rajasthan, Telangana, West Bengal and Delhi – opposed the increase, which was eventually reversed.

Excluding textiles, the GST Council continued the exercise of correcting the inversion of duties.

In June, the council adjusted rates to correct reversed duties on items such as edible oil, solar water heaters, LED lamps, printing ink and knives, among others. Additionally, it imposed a 5% GST on pre-packaged and pre-labeled retail packaging of certain food products to combat tax evasion. It also removed many items from the exemption list.

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