Chief Economic Advisor (CEA) V Anantha Nageswaran feels that the Centre’s goods and services tax (GST) reforms will boost consumption in India. The GST Council on September 3 announced that it has approved the government’s GST reform proposal, which includes modifying the current four tax slabs, into a two-tier system with a special rate on luxury items and sin goods.
Speaking at an event by The Indian Express in Mumbai, Nageswaran noted that while the revised GST may not completely compensate for hiked 50 per cent tariffs imposed by United States President Donald Trump, they “will definitely offset and compensate” for the losses.
CEA on GST cuts: ‘Premature to say states will lose out’
On states expressing concern that the GST rate cuts would impact their revenues and lead to losses, Nageswaran said the old system before GST had no “protection whatsoever” and states should “do more on realising their own tax revenues”.
“We should also realise that in 2021, if we were in the old system, states would not have had any protection whatsoever with the GST collapse that happened. Had they been in the old system and they were collecting their own sales tax revenues, there would have been no backup for that, whereas the 14 per cent guarantee of GST gave them the cushion,” as per Nageswaran.
He added that it is “premature” to conclude that states would definitively lose out due to the rate rationalisation. “We are not accounting for the possibility that the rate reduction can also spur more economic transactions, which will compensate for the price… It’s like a price versus volume kind of framework. It will be premature to conclude or say that there is a huge risk of revenue loss for states,” he added.
According to the CEA, “There are multiple areas in which states can do more on realising their own tax revenues.”
GST reforms: What are the new slabs? Why are states concerned?
While the previous tax structure had four slabs — 5 per cent, 12 per cent, 18 per cent and 28 per cent, plus compensation cess on certain items; the revised tax slabs are 5 per cent, 18 per cent and a special rate of 40 per cent, with no cess.
Notably, the special rate will only apply on items listed as luxury purchases such as private helicopters, and sin goods, such as tobacco and tobacco based products, and aerated drinks.
Meanwhile, eight non-BJP ruled states have called on the government to set up a group of ministers (GoM) panel to study revenue losses and explore possible compensation mechanisms. They are concerned that removal of the 12 per cent and 28 per cent slabs may erode tax revenues of ₹48,000 crore.
