Consider three-rate GST structure with 8%, 15%, and 30%, NIPFP study suggests

admin December 3, 2021
Updated 2021/12/03 at 2:18 PM

According to a National Institute of Public Finance and Policy (NIPFP) study, the government may rationalise the GST rate structure without losing income by replacing the four major rates of 5%, 12%, 18%, and 28% with a three-rate framework of 8%, 15%, and 30%.

The findings of the NIPFP, an independent think tank backed by the Finance Ministry, are significant because the GST Council has tasked a Group of Ministers, led by Karnataka Chief Minister Basavaraj S. Bommai, to propose a tax rate rationalisation and possible merger of different tax slabs by December in order to boost revenues.

At the previous Council meeting in September, Finance Minister Nirmala Sitharaman noted that several rate revisions since the implementation of the GST system in July 2017 have lowered the effective GST rate to 11.6% from the initial revenue neutral rate of 15.5%.

“Merging the GST rates of 12% and 18% into any tax rate lower than 18% may result in revenue loss.” According to NIPFP associate professor Sacchidananda Mukherjee, “the GST Council may contemplate a three-rate structure by adopting 8%, 15%, and 30% for revenue neutrality,” according to The Hindu.

Because the nature of rate adjustments has resulted in nearly 40% of taxable turnover value falling into the 18% tax bracket, any attempt to align that bracket with a lower rate would result in tax losses that would have to be offset by marginal increases in the two major rates — 5% and 28% —

Tobacco items, vehicles, and aerated beverages are all subject to a 28% rate, plus an extra GST compensation cess.

If the income loss from combining the 12% and 18% slabs could be compensated by simply raising the rate on demerit or sin items, the maximum GST rate would have to be about 38%. Alternatively, the lowest standard rate will need to be increased from 5% to about 9%.

The GST system now has eight different rates, including zero for essential goods and special rates of 0.25% on diamonds, precious stones, and 3% on gems and jewellery. After noting that hiking rates on “high-value, low volume products” such as precious stones and jewellery “may promote unaccounted (undisclosed) transactions and so tax leakages,” the NIPFP report assumes these rates stay fixed.

Mr. Mukherjee believes that restructuring GST rates are a good concept for increasing collections and that it is critical to manage the transition to the new rate structure to minimise expenses associated with tax compliance, administration, and economic inefficiencies.

According to the NIPFP report, Revenue Implications of GST Rates Restructuring in India: An Analysis, if the GST rate structure that existed at the time of its inception in July 2017 was restored last year, extra GST revenues of over 1.25 lakh crore may have accrued in 2020–21.

The findings are suggestive due to data restrictions, Mr. Mukherjee said, but the approach adopted in this article might be valuable for any future examination of GST rate structure rearrangement.

“The GST Council may consider making certain aggregate data available to the public to aid policy study,” he said, noting that “binding data limits prevent effective research of the GST system.”

Source: The Hindu

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