Context: The Group of Ministers (GoM) on Rate Rationalisation formed by the Goods and Services Tax (GST) Council has decided to accept the Centre’s two-rate structure proposal for GST. Final decisions on all matters pertaining to GST are taken by the GST Council, as GoMs are only recommendatory bodies.
Earlier, the former Chief Economic Adviser has emphasised the need for simplification of GST structure and rate rationalisation.
Relevance of the Topic:Prelims: Features of GST; GST Rate Rationalisation. Mains: Challenges in GST Implementation.
Features of Goods and Services Tax:
- GST is a single tax levied on the supply of goods and services across all stages of the supply chain (right from the manufacturer to the consumer).
GST subsumes multiple state and central taxes:
- Excise duty
- Service tax
- Additional excise duty
- Additional customs duty
- States sales tax
- Entertainment tax
- Octroi tax (Entry tax)
- GST has dual tax structure:
- CGST (Central GST) goes to the Central Government.
- SGST (State GST) goes to the state government, in which the sale is taking place.
- GST is a destination based tax. During interstate trade, tax is imposed by the state (importing state) in which the consumption takes place instead of the state which supplied the goods/service.
- Rate slabs: There are four primary tax rates (5%, 12%, 18%, and 28%) under GST.
GST Rate Rationalisation
The GST reforms will simplify the tax structure, reduce disputes on classification of products and also boost consumption. They include:
- Elimination of two tax slabs of 12% and 28% in the current GST structure and retention of the 5% and 18% tax rates. This would entail 99% of the items in the 12% slab moving to 5%, and 90% of the items in the 28% slab moving to 18%.
- Special slab of 40% for luxury and sin goods: Ultra-luxury goods (like high-end cars) along with sin goods and services such as tobacco, cigarettes, and online real-money gaming would be moved to a higher 40% slab. However, the compensation cess currently being levied on the items in the 28% slab would no longer apply.
- Proposed exemption of individual life and health insurance premiums from the 18% goods and services tax (GST) slab to nil.
Final decisions on all matters pertaining to GST are taken by the GST Council, as GoMs are only recommendatory bodies. The date of the next GST Council meeting is expected to take place in early September 2025.
Significance:
- Bring down tax burden on consumers: The proposed shift of most items from 12% slab to 5% and from 28% slab to 18% eases costs and enhances affordability for households.
- The GST rate of essential items (food, cloth) is expected to decline to 5% from 12%, the CPI inflation in this category may also come down by 10-15 bps after considering a 60% pass through effect on food items.
- Rationalisation of GST rates of services will lead to another 5-10 bps reduction in CPI inflation on other goods and service items, considering a 25% pass through effect.
- Spur growth of MSMEs: Lower GST slabs will have a subsequent multiplier effect because of lower reduced logistics costs and simplified compliance, especially for MSMEs.
- Makes goods competitive: A lower GST rate for both the final products and their inputs would make Indian goods competitive in global markets.
- GST exemption would provide significant relief to millions of Indians currently paying 18% GST on both life and health insurance premiums.
GST reforms align with the government’s broader agenda of growth and financial inclusion.
Concerns of GST Rate Rationalisation:
- Revenue loss to states due to rationalisation: Earlier rate rationalisation by the GST Council has brought down the effective weighted average GST rate from 14.4% to around 11.6%. With the current rationalisation of rates the effective weighted average GST rate is believed to further come down to 9.5%.
- Positive scenario: Lower GST slabs will encourage consumption in the states, lead to higher sales volumes and can partly make up for lower rates.
- Negative scenario: If consumption growth is not high enough, this will lower the GST revenue of the state (unless compensated by the Central government). According to an SBI research report, estimated revenue loss due to the changes could be ₹85,000 crore per annum and around ₹45,000 crore in the current financial year.
- Burden on exchequer: GST exemption would cost the exchequer an estimated ₹9,700 crore in annual revenue.
However, since more than 70% GST collections come from 18% slab (which is not proposed to be changed in general) the revenue impact of GST cuts may be limited, particularly because reduced prices will spur demand.
There should be a comprehensive discussion on the possibility of loss in revenue for the States due to GST rate rationalisation. If the States incur any losses due to rationalisation, there should be a mechanism to compensate the States and preserve revenue neutrality.
Also Read: Challenges in GST Implementation