Finance minister Nirmala Sitharaman has indicated that the Goods and Services Tax (GST) Council might not delay the much-awaited “rationalisaton” of the rate slabs any longer, and stressed that what is in the offing is a “thorough review”, particularly concerning the items of daily consumption. Importantly, she added that the intent of the exercise, which started three years ago, is to “have fewer and lower rates”. This is indeed a welcome objective, and could give a consumption booster to the economy that is far bigger in magnitude and efficacy than the income tax (I-T) relief announced in the recent Budget.
A large part of the estimated I-T giveaways of Rs 1 lakh crore would be used by indebted households to repay loans. Also, the reliefs might not lead to any incremental consumption by the rich and super rich. A part of the funds forsaken by the exchequer may add to bank deposits as well. The flow of funds to the real economy from this process may not necessarily be prompt and spontaneous, as the banking sector would likely weigh the pros and cons for its own balance sheets. Also, while just 32 million taxpayers are the beneficiaries of the I-T concessions, reduction in GST rates is bound to impact almost the entire population. It would also help keep inflation in check and allow interest rates to reduce. The net result of all this could be a fillip to both consumption and investment demand, which the slowing economy is in dire need of.
The presumption that the way to boost GST revenues — which, after the initial year’s under-performance, have just about approached the pre-GST level and tend to level off — is to raise the tax rates is faulty. True, a wide array of goods and services has seen reduction in tax rates after the launch of GST in July 2017, leading to a fall in the weighted average rate to a little over 11% at present from the so-called “revenue neutral rate” (RNR) of over 15% computed before the onset of the tax. However, it is illogical to resort to rate increases for revenue gains. The concept of a permanent RNR is erroneous in a world where innovations and technology constantly create new goods and services, and tax bases keep altering across the board, typically with a bias for widening.
The minister signalling a lowering of tax rates is especially good news, given that it comes in the backdrop of a reported move to make the GST cess on assorted “luxury and demerit” goods virtually a permanent feature, by merging them with the top tax slab effective April 1, 2026. Consumption of luxury items may be largely confined to the top of the income pyramid, but the demand for high-value items is also what millions of workers rely on for their jobs and income. A prohibitive tax on them would do no good for the economy. After all, the GST cess was meant for the specific purpose of finding resources for the revenue guarantee accorded to states for the initial five years of GST. That purpose no longer exists. The slab rejig must involve simplification of the structure by reducing the tax rates to two — a lower merit rate and a standard rate — with minimal exemptions. The average rate on a weighted basis ought to be below 10%. This would help improve revenue buoyancy and give an impetus to economic growth.
Source from: https://www.financialexpress.com/opinion/promise-of-a-benign-gst/3740323/
