The GST Council, chaired by Finance Minister Nirmala Sitharama, may hike the Goods and services tax (GST) rate on mobile phones and clothes on the meeting scheduled on December 18. This might be part of an experiment to correct the inverted tax structure and to enhance the collection of revenue.

A large amount of input tax credit outgoing results from the structure of higher tax rates on inputs than on output products. Some products that saw a inverted duty structure include cloth containers, boots, tractors, etc. The inverted tax structure is a situation in which tax rates on input supply are higher than on final supply.

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The GST rate for mobile phones is 12 percent, compared to 18 percent for phone parts and batteries, prompting an inverted tax structure. This, in effect, contributes to unused input tax credit and therefore outgoing in the form of  refunds.

Last year, a single supplier claimed a refund of nearly Rs 4,100 crore in the case of phones. A government official said that mobile phones and fabric could see GST rate rectification, pointing out that the issue of inverted tax structure resulting in huge refunds outgoing.

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A registered taxpayer can claim refund of unclaimed input tax credit due to higher input tax and lower output tax.

Likewise, cloth has a 5% GST rate while different yarn types are taxed at 12%. The government initially did not allow fabric producers to claim input tax credit refunds, but later allowed refunds at the meeting in July 2018.

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“In First Place, input tax credit refunds on fabric should not have been permitted. At that time, it was a political call. Now it should be addressed,” another official said.

Both goods and services are currently covered by four GST tax slabs-5, 12, 18 and 28 percent. Reforming the slab levels could help the government earn additional Rs 1,000 crore revenue per month.

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If all state finance ministers agree, the GST rate on cloth will definitely be increased from 5% to 12% to correct the inverted tax structure. In fact, a sub-committee of officers from centre and some states has been set up to compile a list of items where there is an inverted tax structure.

As far as shoes are concerned, those priced under Rs 1,000 are taxed at 5%, while non-woven fabric and leather are taxed at 12%. Components of the tractor are taxed at 28% whereas the tractor is taxed at 12%.

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The Center has sought suggestions for increasing revenue in order to meet the GST Revenue short fall of states, including areas where the inverted tax structure could be corrected by the Council.

The Center’s plan to increase revenue involves increasing the slab of 5 per cent to between 6 and 8 per cent somewhere, and removing the slab of 12 per cent. It has found few takers among states.

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However, as it will adversely affect products of mass consumption. Another choice to be discussed is to raise the GST rate on certain products in the 5 per cent band to 12 per cent, and those in 12 per cent to 18 per cent.

It is also likely that the GST Council would purposely increase the cess on certain goods to meet the growing need for compensation.