The GST reform announced by Union Finance Minister and Nirmala Sitharaman promises structural changes in the economy with across-the-board benefits to multiple sectors. In an interview with Fortune India, Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal says it was the right time for next-generation GST reforms on the back of the stability and tax buoyancy.

Q. GST 2.0 is a massive reform involving rate rationalisation and multiple policy changes aimed at ease of doing business. A lot must have gone into it. Kindly help us understand the thought that went into it in the build-up to the reforms?

On rate rationalisation, the GST Council had set up a Group of Ministers. They were supposed to recommend the rates to the GST Council. They made an interim report in 2022. On that basis, certain changes have been made. But the real push came when the Centre gave recommendation to the GST Council on rate cuts in August.

Q. What was the basis of the rate rationalisation exercise?

GST has completed nearly eight years. And there has been robust growth in the GST revenue. In fact, last year, gross GST collection was ₹22 lakh crore. GST has stabilised, and the tax buoyancy is also good. So, it was thought that this was the right time to make a big push for the next-generation reforms.

In the existing structure, there are five rates—5%, 12%, 18% and 28%—apart from certain items that are exempt and a special rate on a few items. This large number of tax slabs was causing many classification issues and disputes. We conducted a study to identify where most classification issues arise. We have noticed that the food sector is one where the most disputes arise because the goods are subject to either exemptions or rates of 5%, 12%, or 18%. Classification of the food items was done as per the common understanding and the process of manufacturing. So with the new products and manufacturing process coming up, we’re getting classified as residuary entry, even though they may have merited classification in other entries based on the manufacturing process.

Q. Apart from food, which were the other major sectors where classification issues were coming up?

The other area was automobile components, which were classified under various competing entries. They were subjected to either 18% or 28% GST. This kind of scenario was creating a lot of uncertainty from various industries, and at times, we received representation from investors who wanted to set up their industry in India. They also pointed out that these uncertainties may come in the way of making investments in the country. Therefore, it was decided that there is an urgent need to restructure GST, and there should be only one standard rate, and the goods which merit a lower rate should be taxed at a lower rate.

Q. How were the individual items for 5% slab and 18% slab decided?

So, that was the thought behind the two-slab structure. But apart from that, a comprehensive exercise was done on how to place the items in these two rates. Each item under 12% and 28% was examined, and a call was taken on whether it should move to the lower side or the other side. Since the items were under 12%, most of them were of merit nature. So, most of them were moved to 5%, barring a few. In 28% most of the items have been moved to 18% barring a few.  

Q. Tobacco was earlier under a 28% slab, with cess taking the total incidence of tax almost three times the amount of tax itself. What will be the tax incidence once the new rates kick in after the recovery of cess to pay the debt?

For a very few items that are considered sin goods like tobacco, paan masala, sugary drinks, and certain services like casino, horse racing, and online money gaming should be subjected to a levy at 40%. It was thought that certain luxury cars should also be taxed at 40%.

Once the compensation cess is recovered to repay the loans, the duty incidence on these items will be kept on the same level as they are attracting at present. It will not come down. As per the law, more than 40% cannot be levied. But it will be ensured by way of other levies so that the incidence of tax on these items remains at the same level. Paan masala currently attracts 28% GST and a 60% compensation cess, totalling 88%. Similarly, on cigarettes, there is GST, compensation cess, central excise, and CCD. A similar arrangement is there for chewing tobacco. 

Q. What will happen to luxury cars?

Luxury cars will remain under the 40% slab, and the new rates will be applicable from September 22. As of now, the new rates are not applicable to tobacco, pan masala, and chewing tobacco. On these items, a call will be taken at the appropriate time. But some mechanisms will be worked out to keep the incidence the same. 

Q. Insurance companies have raised concerns about input tax credit. Your views?

In case of insurance, the only thing that has been done in this exercise is to exempt the life insurance policies taken by individuals and the health insurance policies taken by individuals with a family floater. Complete exemption has been brought. To that extent, the cost of buying a policy should come down.

Since they will not be able to avail ITC on the inputs, the cost of the input will go up. But whatever amount is paid by the insurance companies on these items will now come into the hands of the buyers. Revenue implication on account of providing exemptions to these two things is not a small amount. Provided they pass on the benefit to the end consumer. This is the expectation that the insurance companies will completely pass on the benefit to the policyholders.