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Government considering rejig of India’s GST rates

Government considering rejig of India’s GST rates

The Indian government is being urged to scrap the current four rates of the Goods and Services Tax (GST) and replace them with three new rates.

The National Institute of Public Finance and Policy (NIPFP), an autonomous think tank backed by the Finance Ministry, is recommending the four major rates of 5%, 12%, 18% and 28% are replaced with rates of 8%, 15% and 30%.

“Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss. Our study proposes that the GST Council may consider a three-rate structure by adopting 8%, 15% and 30% for revenue neutrality,” said NIPFP associate professor Sacchidananda Mukherjee.

Multiple rate changes since the introduction of GST in July 2017 have brought the effective GST rate to 11.6%, down from the original rate of 15.5%.


Loss of tax money

The rate changes have also meant that over 40% of Indian companies’ taxable turnover now falls in the 18% tax bracket, and a drop in that rate will inevitably lead to a loss of tax revenue. This could be offset by marginal hikes in the other remaining major rates — 5% and 28%, according to the NIPFP.

Mukherjee said: “The 28% rate is levied on goods such as tobacco products, cars and carbonated drinks. If the revenue loss from merging the 12% and 18% rates were to be met by just hiking the rate on demerit or sin goods, the highest GST rate would have to be raised to almost 38%. Alternatively, the lowest standard rate will have to be raised from 5% to about 9%.”


Revenue ‘leakages’

Currently, the GST regime levies eight different rates, including zero for essential goods and special rates of 0.25% on diamonds, precious stones and 3% on gems and jewellery. The NIPFP paper assumes these rates remain unchanged after noting that raising rates on ‘high-value low volume goods’ like precious stones and jewellery “may encourage unaccounted (undisclosed) transactions and therefore revenue leakages” said Mukherjee.

“Restructuring GST rates is a timely idea to improve revenues,” he said. “It was important to sequence the transition to the new rate structure so as to minimise the costs associated with tax compliance, administration and economic distortions.

Mukherjee added: “The results are indicative given the limitations of data, but the methodology developed in this paper could be useful for any future analysis of restructuring of the GST rate structure.”

Click here to access the NIPFP’s report ‘Revenue Implications of GST Rates Restructuring in India: An Analysis’.