Explained | Will India’s Goods and Services Tax rates be restructured this year?   

What is the need to rationalise the GST rates? Can we expect the rate reset this year?   

The story so far : The GST regime, about to complete five years this July, is due for an overhaul in tax rates levied on different products because of structural anomalies and to reduce the multiple tax slabs.. A ministerial group of the GST Council, under Karnataka Chief Minister Basavaraj S. Bommai, was tasked last September to suggest immediate changes, as well as a roadmap for short- and medium-term changes to the GST rate structure. The group of ministers (GoM) is yet to conclude its deliberations. 

From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs taxed more than the final product. There are five broad tax rates of zero, 5%, 12%, 18% and 28%, with a cess levied over and above the 28% on some ‘sin’ goods. Special lower rates are levied on items like precious stones and diamonds. Tax experts have been flagging that these are far too many rates and do not necessarily constitute a Good and Simple Tax.    

For the government, the top priority, apart from simplifying the tax structure in the hope of bolstering compliance, is to rake in more revenues as they believe collections have been underwhelming. At the last full-fledged GST Council meet, Finance Minister Nirmala Sitharaman had stressed that the new indirect tax system was premised on a revenue-neutral tax rate of 15.5%, but actual revenues have been steadily going down taking the effective tax rate to 11.6% “Knowingly or unknowingly, [the rate] was brought down by reduction in tax rates of some items,” the Minister had said. Some of these frequent rate cuts were approved by the Council on the eve of critical elections.   

The need to shore up revenues was also flagged as the assured compensation period for States under the GST compact expires on June 30, so their fiscal space will depend on actual collections thereafter. The Council set up two GoMs to resolve this – one to examine more technology and schemes to improve tax compliance, and another under Mr. Bommai to rationalise tax rates to correct anomalies and consider the merger of different tax slabs. 

Yes, they have – GST revenues have scaled fresh highs in three of the first four months of 2022, going past ₹1.67 lakh crore in April. The government terms this a sign of economic recovery and a reflection of the measures to tighten the screws on tax evaders, but there is another key factor — the runaway pace of price rise. Wholesale price inflation, which captures producers’ costs, has been over 10% for over a year and peaked at 15.1% in April. Inflation faced by consumers on the ground has spiked to a near-eight year high of 7.8% in April. In a recent note, Ambit Capital analysts Sumit Shekhar and Eashaan Nair stressed that higher GST revenues “should not be confused” with a rise in consumption which is just 2% above pre-pandemic levels. The rise in prices, they said, was “the single most important factor for higher tax inflows” along with higher imports, compliance tweaks and a boom in the consumption of high-ticket items even as mass consumption goods and services languish..   

Ambit reckoned that a hike in GST rates is ‘almost certain’ this year to ensure high collections sustain and States get enough money from July onwards. But any rejig and merger of GST rates will entail some products being taxed higher, with concomitant ripple effects on prices. “The Centre and the States are not unmindful of the desperate need to rationalise the rate slabs and structure but we just need to get the timing right. When inflation is the top worry, whether the Council is ready to tackle this, is a key question,” averred a top government official. The Council is aware of the need to rationalise rates since at least 2019, but has deferred action each year due to macro-level compulsions — starting with slowing growth in 2019-20, followed by the pandemic’s onset and the fledgling recovery in 2021-22. With inflation, much of it imported through pricier fuels, commodities and food items, expected to hover high through the year, the GST rate reset hopes appear bleak in 2022-23. Even if the conflict in Europe eases or ceases, its aftermath through sanctions as well as other supply chain disruptions could persist and keep prices high in 2023-24 as well. This may mean an even longer wait for a simpler GST regime, especially as tax hikes are unlikely to be a savoury option ahead of the 2024 general election.