The Group of Ministers (GoM) on rate rationalisation has suggested keeping the present rates for the goods and services tax in place primarily due to concerns about possible revenue losses and budgetary autonomy.
Sources said that although it is doubtful that any progress will be made on the matter at this time, the matter will probably be discussed at the GST Council meeting on September 9. The current pricing structure and potential changes to a defined list of issues that were recommended to an official committee will be presented.
The Deputy Chief Minister of Bihar, Samrat Chaudhary, chaired the Group on Rate Rationalisation (GoM) in late August, and the group chose to stick with the present GST rate structure. Currently, there are five rates for GST: 0%, 5%, 12%, 18%, and 28%. Additionally, there is a cess that is applied to some luxury and demerit items above the highest rate.
Government sources and observers of policy say that one of the main reasons governments are reluctant to adjust rates at this time is the possibility of losing money. According to a source with knowledge of the issue, “one must remember that the Constitutional provision of the compensation cess has now ended and states will not be made good for any losses they face due to a tweak in the rates.”
According to a different source, states may not be enthusiastic about expanding the GST to include the real estate, energy, and oil industries because they fear losing more of their fiscal autonomy. “These are basically the primary income streams that states might use to get more taxes as needed. The source stated that if they are combined with GST, it could be difficult for them to collect money in the event of an emergency, but it also pointed out that talks on these matters have not yet begun.
Shivam Mehta, Executive Partner at Lakshmikumaran and Sridharan, noted that the GoM appears to be leaning towards keeping the current slab rates. Although the exact reasons are unknown at this time, one potential explanation could be revenue loss because the government receives nearly two-thirds of its GST revenue from the 18% slab, while items in the 12% slab rate contribute one-third of the revenue.
“Moderating the rates would inevitably require combining the present rates of 12% and 18% to 15%; or 5% and 12% to 7-8%. This might lead to items that are currently subject to 18% or 12% taxation falling into a lower tax band of 15% or 7-8%. “The States may have to bear the double whammy of withdrawal of compensation cess and loss of revenue as a result of rationalisation,” he added, adding that the GoM may also be restricted by their objections.
Tax experts also noted that customers were eagerly awaiting rate rationalisation and that a thorough examination may take more time. The goal of GST rate rationalisation, according to Sanjay Chhabria, Indirect Tax Lead at Nexdigm, is to reduce the number of GST rate slabs and rearrange the current GST rates to reduce economic distortions such as inverted duty structures, lower litigation, and improve tax administration.
The recent statement made by a ministerial panel of the GST rate rationalisation committee (RRC) seems to imply that there may not be a change in the GST rate slabs, even though there may be widespread expectations among stakeholders of a significant reshuffle. This is because not all RRC members support changing the GST rate slabs. Nonetheless, he stated that it may be imminent to reduce the GST rate from 12% to 5% and provide an explanation for the same.
He added that while GST rates depend on a variety of factors, the member states of the GST Council and industries have varying interests, and finding a consensus on rate adjustments amongst all stakeholders can be difficult and time-consuming. Careful planning and extensive consultation with stakeholders are necessary for a rate rejig or adjustment of GST rates across India’s diverse landscape to avoid unintended consequences.
