The proposed restructuring of goods and services tax (GST) rates may lead to an initial dip in states’ revenues but the resulting boost to demand and consumption is expected to offset the loss, Economic Advisory Council to the Prime Minister (EAC-PM) chairman S Mahendra Dev has said.
The reforms were designed to stimulate demand, he said, referring to the proposals, which include doing away with 12 and 28 percent slabs, which Prime Minister Narendra Modi said would ease citizen’s tax burden. “The reduction in GST rates after changes in rates will also lead to higher consumption and higher growth,” Dev told Moneycontrol in an interview.
Referring to an SBI Research estimate, he said the combined effect of the income-tax rate cut and GST reforms could result in a consumption boost of Rs 5.5 lakh crore.
“Additional GST revenue is estimated to be around Rs 52,000 crore that could be equally divided between Centre and states. The total increase in aggregate demand due to GST reforms is Rs 1.98 lakh crore and this amounts to a 0.6 percent increase in GDP,” Dev said.
There have been demands to reduce the number of GST rates since it was introduced in 2017. Modi on August 15 announced plan to overhaul the GST regime.
“The proposed new GST rates may lead to revenue loss for states. On the issue of compensation to states, the GST Council is going to meet on September 3–4 and may discuss the recommendations of the groups of ministers such as rates, ease of compliance and compensation,” Dev said.
If lower rates encourage more consumption and compliance, the resulting increase in tax collections can compensate for the loss, he said.
A few days ago, a group of ministers approved a two-rate GST structure that moves 90 percent of items in the 12 and 28 percent slabs to lower brackets. The GST Council is expected to take a final call on doing away with the two slabs when it meets in New Delhi next week.
Fiscal deficit
The finance ministry has indicated that the revenue neutral rate (RNR) could fall below 10 percent if the GST Council approves the proposed rate changes. Responding to concerns about fiscal consolidation, Dev said the government’s fiscal targets would not be derailed.
“Yes, the revenue neutral rate may fall below 10 percent after restructuring the rates. It may not have much impact on fiscal consolidation of the government. The revenue loss is likely to be more than compensated by the potential revenue gain post the GST rate restructuring,” he said.
Devi said the SBI report estimates minimal or non-existent impact on fiscal deficit. “The government is likely to stick to the target of 4.4 percent of fiscal deficit in FY26,” he added.
RNR is the rate that ensures that tax revenue remains the same after the shift from the previous indirect tax system to GST. It is the rate at which states and the Centre would not lose revenue compared to what they were earning before GST was introduced in 2017. If the GST rate falls below the RNR, there could be a short-term loss of revenue.
Dev said GST reforms are not unilateral but the result of consensus. “The decisions on GST are taken by the GST Council and it has representation of 31 states and union territories… Therefore, the GST reforms on rates by the Council are the joint decisions of the states and the Centre,” he said.
