Moneycontrol Pro Panorama | Government needs to iron out GST wrinkles

#45th Meeting of GST Council, #goods and services tax (GST), #MC Pro Panorama, #Moneycontrol Pro Panorama, #Newsletter, #opinion, #Politics, today’s edition, do head here, Dabur, Bharat Electronics, Glenmark

FM Nirmala SItharaman

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

What does a 5 percent tax on food delivery to be levied on app-based platforms such as Swiggy and Zomato achieve? Given their valuations, no one may shed tears for them, what with the listed Zomato sporting a market cap of Rs 1.1 lakh crore. But this tax will not come out of their pockets and instead will be paid by consumers, so expect your food bills to become more expensive.

But wait, don’t restaurants already pay tax? There’s a 5 percent tax on food charged by restaurants except for those that fall below the threshold limit of GST registration. The limit for registration was Rs 20 lakh of annual revenue initially and was increased to Rs 40 lakh from 2019.

If the tax was already in place, what changes now? Higher compliance could be one answer, as delivery apps will collect and remit the tax. But does this mean tax compliance by restaurants is low and that’s why the onus is being put on food delivery apps? What about the offline sales that these restaurants do? Then, will tax continue to leak on that?

While compliance seems a weak reason to bring food delivery apps into the tax collection system, there could be another reason. A number of suppliers are small operators, such as individuals running a small catering business, supplying food via these apps but not registered under GST. If the new rule is applicable to all app orders, these orders will be taxed, too.

Won’t small businesses suffer? But it’s the consumer who pays. The logic may be that anyone who can afford to order food via an app can afford to pay a 5 percent tax, too. If done, it will be a reverse charge of sorts. An unintended impact could be to level the playing field between bigger restaurants and smaller suppliers on the tax front, putting the smaller businesses at a disadvantage.

Food delivery may be a very visible target to increase collections. For instance, cloud kitchens too will have to pay a 5 percent GST, having been put on the same footing as a restaurant. The bigger picture that emerges is of a government that’s keen to raise GST revenue. This is despite collections improving after the sharp fall during the first wave.

The reason becomes visible, when you hear the finance minister talk about the revenue neutral rate falling to 11.6 percent instead of the original 15.5 percent. This has affected revenue collections. The many concessions made initially to bring GST to life and then to address concerns of various stakeholders have affected the rate. This is one reason for lower collections than expected, while there are others too such as poor compliance and an economic slowdown.

While compliance is being addressed, that’s not enough and a higher tax rate will be required too. Therefore, you will see items being nudged up the rate slabs, where possible. That’s why there’s a focus on rationalisation of the tax rate structure, to increase collections.

Even the steps taken to correct the inverted duty structure have seen an increase in the rate of inputs to match the finished product tax, rather than lowering the tax on the finished goods to match the tax on the raw material. Expect more such steps in future iterations of the GST Council meetings once the ministerial groupings tasked with addressing these issues come back with their recommendations.

But it’s not just enough to tinker with rates to try and improve collections. In today’s edition, we argue that the government should focus on the structural issues surrounding GST. There is the issue of the compensation being paid to states to bridge the difference between actual revenue earned and projected revenue. State governments were looking for a longer term solution to the compensation so that it continues beyond FY22 when it is due to expire. There is also the question of petrol/diesel being brought under GST, an important component that is excluded from the GST net at present. While the more immediate need may be to increase collections, a road map to address the structural issues is also needed.

Nifty at 20,000: Our research team has been assessing the depth and breadth of the market rally, to address the question on most investors’ minds — How long can this continue? To read on where the Nifty is headed, on investors vs central banks, what sectors to focus on and the risks to the rally, do head here.

Investing insights from our research team:

Is Manappuram Finance a worthy bet after its dismal show?​

What else are we reading today?

Robots have entered a new phase — and Cathie Wood’s Ark is betting on it (Republished from the FT)

LinkedIn may be the nerdiest social network — but its strategy is working (Republished from the FT)

Technical Picks: DaburBharat Electronics and Glenmark (These are published every trading day before markets open)

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