Revenue losses, no compensation cess seen to be reasons for GoM wanting to retain current GST rate structure

Concerns over potential revenue losses as well as fiscal autonomy are seen to be the main reasons why the Group of Ministers (GoM) on rate rationalisation has proposed continuing with the current rate structure for the goods and services tax.

According to sources, the issue is likely to be taken up at the upcoming meeting of the GST Council on September 9, but it is unlikely that there will be any progress on it as of now. A presentation will be made on the current rate structure as well as possible tweaks in a specified list of items that had been referred to a committee of officials.

In late August, the GoM on rate rationalisation, headed by Bihar’s Deputy Chief Minister Samrat Chaudhary had met and decided to continue with the current rate structure for GST.

At present, GST has five rates—zero, 5%, 12%, 18% and 28%—as well as a cess that is levied above the highest rate on specified luxury and demerit goods. 

Policy watchers and government sources believe that potential revenue losses are one of they key reasons why states are unwilling to bring any change in rates as of now. “One must remember that the Constitutional provision of the compensation cess has now ended and states will not be made good of for any losses they face due to a tweak in the rates,” said a person familiar with the development.

Another source also pointed out that states are concerned about giving up further fiscal autonomy and may not be keen on extending GST to other sectors including real estate, electricity and oil. “These are largely the main sources of revenue through which states can get some additional taxes if needed. If these are also merged with GST, it could make it troublesome for them to raise revenue in case of any eventuality,” noted the source but pointed out that discussions on these issues are yet to start.

Noting that the GoM seems to be leaning towards retaining the existing slab rates, Shivam Mehta, Executive Partner, Lakshmikumaran and Sridharan pointed out that while the precise reasons are not known yet, one possible reason may be loss of revenue since the government receives almost two-thirds of its GST revenue from the 18% slab while one third of revenue is contributed by items in 12% slab rate.

“Tweaking the rates would necessarily entail some sort of consolidation of the existing rates of 12% and 18% to 15%; or 5% and 12% to 7-8% which in turn could result in goods currently attracting 18% or 12% to fall under a lesser tax bracket that is 15% or 7-8%. “Besides revenue implications, the GoM may also be constrained by the reservations expressed by the States who may have to bear the double whammy of withdrawal of compensation cess and loss of revenue as a result of rationalisation,” he said.

Tax experts also pointed out that rate rationalisation was keenly awaited by consumers and a comprehensive review could take longer.

Sanjay Chhabria, Indirect Tax Lead, Nexdigm noted that GST rate rationalisation aims at reshuffling of current GST rates and reduction in number of GST rate slabs to minimize economic distortions like inverted duty structures, reduction in litigation as well as leading to an efficient tax administration.

“While there may be wide ranging expectations across stakeholders of a major re-shuffle, the recent statement by one of ministerial panel of GST rate rationalisation committee (RRC), seems to suggest that there may not be a rejig in the GST rate slabs, as not all members of the RRC are in favour of GST rate slab rejig. However, reduction in GST rates from 12% to 5% and clarifications on GST rates could be clearly on cards,” he said.

For a rate rejig or adjusting GST rates across India’s diverse landscape requires meticulous planning and extensive consultation with stakeholders to avoid unintended consequences, he said, adding that while GST rates depend on various factors, the member states of GST council and industries have varying interests, and finding a consensus on rate adjustments amongst all stakeholders can be challenging and time consuming.