Key Decisions and Outcomes of the 45th GST Council Meeting

The 45th Goods and Services Tax (GST) Council convened physically in Lucknow, Uttar Pradesh, on Friday, September 17, 2021. This marked the first in-person meeting after a series of virtual sessions over eighteen months. Union Finance Minister Nirmala Sitharaman chaired the significant gathering.

Major Announcements from the 45th GST Council Meeting

The Finance Minister's press briefing highlighted several critical discussions and decisions made during the Council meeting:

• Life-Saving Drugs: Certain expensive drugs for muscular atrophy, such as Zolgensma and Viltepso, received GST exemption. Additionally, specific health ministry-recommended drugs for similar conditions, imported for personal use, are now exempt from Integrated GST (IGST).
• COVID-19 Treatment Medications: Concessions on essential COVID-19 drugs have been prolonged until December 31, 2021. This includes Amphotericin B (nil rate), Remdesivir (5% rate), Tocilizumab (nil rate), and anti-coagulants like Heparin (5% rate). The list of drugs benefiting from a 5% GST rate has been expanded to include Itolizumab, Posaconazole, Infliximab, Favipiravir, Casirivimab & Imdevimab, 2-Deoxy-D-Glucose, Bamlanivimab, and Etesevimab. However, this extended relief does not apply to medical equipment.
• Cancer Medications: GST on various cancer-related drugs, including Keytruda, has been reduced from 12% to 5%.
• Retrofitment Kits for Disabled Persons: The GST rate on retrofitment kits for vehicles used by disabled individuals has been lowered to 5%.
• Fortified Rice Kernels: GST on fortified rice kernels, particularly those used in Integrated Child Development Services (ICDS), has been cut from 18% to 5%.
• Bio-diesel: The GST rate for bio-diesel supplied to oil marketing companies saw a reduction from 12% to 5%.
• Transport of Exported Goods: Goods exported by sea vessels and air cargo are exempt from GST until September 30, 2022.
• National Permit Fee: The National Permit Fee, required for goods carriages operating across India and contiguous states, has been exempted from GST.
• Skill Development Programs: Training initiatives for skill enhancement, either entirely or substantially funded (75% or more of the cost) by central or state governments, are now exempt from GST.
• Imported Aircraft and Leased Goods: To prevent double taxation, the import of aircraft and other leased goods is now exempt from IGST. Corresponding amendments will be made to customs laws. Lessors in Special Economic Zones (SEZ) who pay GST under forward charge are also granted this exemption.
• Inverted Duty Structure (IDS) Corrections:
  • Footwear and Textile Sectors: Anomalies in the inverted duty structure for these sectors are slated for correction starting January 1, 2022.
  • Ore Concentrates and Metals: The inverted tax structure caused by an 18% GST on royalty for input services related to ore concentrates and specific metals has been addressed, though an implementation date is yet to be finalized.
  • Pens and Parts: All types of pens and their components will now be taxed at 18% GST to rectify the inverted tax issue.
  • Renewable Energy Devices: Inputs for specified renewable energy devices were previously taxed at 18%, while the devices themselves were at 5%. To promote domestic manufacturing and the Aatmanirbhar Bharat Mission, a harmonized GST rate of 12% has been prescribed for these energy devices.
  • Railway Parts and Locomotives: GST on railway parts and locomotives (under Chapter 86) has been increased from 12% to 18% to correct the inverted tax structure.
• Petrol and Diesel Inclusion in GST: The Council discussed bringing petrol and diesel under the GST regime but concluded that it was not an opportune moment for such a move.
• Revenue Neutral Rate: The original revenue-neutral rate at GST implementation was 15.5%, which has now decreased to 11.6%.
• Compensation Cess Extension: The collection of compensation cess will continue beyond July 2022, specifically until March 2026, to facilitate the repayment of amounts borrowed in the preceding and current fiscal years to compensate states.
• Group of Ministers (GoM) on Compliance: A GoM has been established to review e-way bills, compliance procedures, FASTags, technology utilization, compensation cess, loophole plugging, and other related matters.
• GoM on Rate Rationalization: Another GoM has been formed to deliberate on the rationalization of rates for certain goods and services.
• Food Delivery Apps: E-commerce operators are now responsible for collecting and paying GST on restaurant services provided through their platforms, with a few specified exceptions.

Note: All aforementioned rate changes are effective from the date of the Central Board of Indirect Taxes and Customs (CBIC) notification.

GST Rate Clarifications for Goods

GST Rate Clarifications for Services

Recommendations for GST Law and Procedure

Several recommendations were made to enhance GST laws and procedures:

• Form GST ITC-04 Filing Relaxation: To ease trade facilitation, taxpayers with an annual aggregate turnover exceeding Rs.5 crore in the preceding financial year now need to furnish Form ITC-04 semi-annually. For those with turnover up to Rs.5 crore, the form needs to be filed annually.
• Interest on Ineligible ITC: The Council decided to retrospectively amend Section 50(3) of the CGST Act, effective from July 1, 2017. This amendment clarifies that interest is to be charged only on "ineligible Input Tax Credit (ITC) availed and utilized," rather than on "ineligible ITC availed." Furthermore, interest on such ineligible ITC availed and utilized will be charged at 18% from July 1, 2017.
• Transfer of Cash Ledger Balance: The unutilized balance in CGST and IGST cash ledgers can now be transferred between distinct persons (i.e., entities with the same Permanent Account Number (PAN) but registered in different states) without requiring a refund process, subject to specific safeguards.
• Circulars for Clarity: Several circulars will be issued to resolve ambiguities and legal disputes, including:
  • Clarification on the scope of "intermediary services."
  • Interpretation of "merely establishment of distinct person" under Section 2(6) of the IGST Act 2017 for export of services.
  • Clarification on other GST-related issues.
• Refund Procedure Ambiguity: A provision will be incorporated into the CGST Rules to clarify the procedure and time limit for filing refunds related to tax wrongfully paid, as per Section 77(1) of the CGST and SGST Acts and Section 19(1) of the IGST Act.

Measures to Streamline Compliance

New measures were introduced to simplify and enhance compliance:

• Aadhaar Authentication for Refunds/Revocation: Aadhaar authentication for registration is now mandatory for taxpayers to be eligible for claiming refunds or applying for the revocation of registration cancellation.
• Auto-population of Late Fees: Late fees for delayed filing of Form GSTR-1 will be automatically calculated and collected in the subsequent Form GSTR-3B return.
• Bank Account for GST Refunds: GST refunds will only be credited to the bank account linked with the PAN used for GST registration.
• GSTR-1 Filing Restriction: Effective January 1, 2022, Rule 59(6) of the CGST Rules will be amended to prohibit registered persons from furnishing Form GSTR-1 if they have not filed their GSTR-3B return for the preceding month.
• ITC Restriction (Rule 36(4)): Rule 36(4) of the CGST Rules will be amended once the proposed clause (aa) of Section 16(2) of the CGST Act is notified. This amendment will limit the availability of ITC concerning invoices/debit notes to the extent that suppliers have provided details of such documents in Form GSTR-1/IFF and these have been communicated to the taxpayer in Form GSTR-2B.

Note: The rate changes and exemptions mentioned above take effect from the date of the CBIC notification.

Key Expectations from the 45th GST Council Meeting

Ahead of the 45th GST Council meeting, several popular expectations were widely discussed:

Potential Extension of Tax Concessions on COVID-19 Essentials

Given the anticipation of another potential COVID-19 wave later in the year, health authorities expected the government to prolong tax concessions on essential treatment items. Previously, the GST Council had reduced rates on COVID-treating drugs like Tocilizumab and Remdesivir, along with medical oxygen, concentrators, and other critical supplies, with these reduced rates initially valid until September 30, 2021.

Discussions on GST Compensation to States

A significant agenda item involved determining the duration and amount of GST compensation for states. Amid economic challenges, the Council was anticipated to recommend extending state compensation beyond June 2022, factoring in input from all state representatives. Opposition-ruled states advocated for a five-year extension. However, the central government expressed concerns that further borrowing or cess collections to cover revenue shortfalls might not be effective. Union Revenue Secretary Tarun Bajaj warned that extending GST compensation could necessitate additional central government borrowing and a prolonged compensation cess on "sin goods," which would impact consumers.

Revenue Augmentation Strategies

The Council was expected to explore measures for increasing revenue. It was noted that current GST rates are considerably lower than average pre-GST taxes, with the revenue-neutral rate at 15.6% versus the current average GST rate of 11.4-11.5% (as per an RBI study). This disparity has contributed to lower-than-expected GST revenue collections, prompting deliberations on streamlining and rationalizing the GST rate structure. While GST collection trends from previous months were reviewed, a government official indicated that the Council would not soon decide on reducing GST rates for the automobile sector, despite increasing speculation. Punjab Finance Minister Manpreet Badal proposed that the Council could establish cap and floor rates for states to levy and collect State Goods and Services Tax (SGST) after June 2022, providing a defined range.

Addressing the Inverted Tax Structure

The GST Council was poised to make final decisions on correcting the inverted tax structure affecting several key sectors, particularly textiles, fabrics, and footwear. The footwear industry, in particular, was experiencing significant profitability challenges due to this issue, underscoring the urgent need for rate corrections in the sector.

New Measures to Combat GST Tax Evasion

With a rising incidence of tax evasion, including a surge in fraudulent Input Tax Credit (ITC) claims nationwide, the Council was likely to announce new measures to strengthen anti-evasion policies. Odisha Finance Minister Niranjan Pujari suggested an alternative method for taxing pan masala and gutkha, proposing a levy based on production capacity rather than actual sales to curb evasion. The government concurred that innovative approaches are essential for revenue augmentation while effectively combating tax evasion.

The 45th GST Council meeting was the first to be hosted in Lucknow. Prior to the main session, the Union Finance Minister met with GST officials and a sub-committee of the GST Council on September 16, 2021.