A group of ministers (GoM) approved, in principle, the Union government’s proposal to reduce the number of Goods and Services Tax (GST) brackets from four to two main slabs in order to substantially reduce tax burden on the consumer, although some of the ministers expressed concerns over the revenue implication of the move and sought ways in which the states could be compensated.
The Centre proposed significant GST reforms encompassing structural changes, rate rationalisation, and ease of living measures. It proposed to eliminate two tax slabs of 12% and 28% and retain the 5% and 18% tax rates with a special slab of 40% for so-called luxury and sin goods.
The panel’s head and Bihar deputy chief minister Samrat Choudhary confirmed that GoM members are in favour of the rate rationalisation, but added some of them have made certain observations that will be discussed in the GST Council. “ GoM has decided to accept the two proposals of the Centre,” Choudhary said.
Final decisions on all matters pertaining to GST are taken by the GST Council as GoMs are only recommendatory bodies. The six-member GoM has three members from BJP-ruled states of Bihar, Uttar Pradesh and Rajasthan, and three members from the Opposition-ruled states — Karnataka, Kerala, and West Bengal.
According to people familiar with the matter, most states are willing to sign off on the rate rationalisation if the move benefits the common man — but they do not want to take any hit on their revenues. According to an SBI research report, estimated revenue loss due to the changes could be ₹85,000 crore per annum and around ₹45,000 crore in the current financial year.
“In the current GST structure, the majority of revenue share comes from goods having GST rate of 18% followed by goods having GST rate of 28%,” the report said.
To be sure, the government’s thinking is that a surge in demand could offset much of the losses.
Uttar Pradesh finance minister Suresh Kumar Khanna, who is part of the GST Council, said the Centre’s proposal is in the interest of the common person. He said a considered view would be taken by the GST Council, which will also calculate revenue implications of the tax reform.
West Bengal finance minister Chandrima Bhattacharya, also part of the council, supported the proposal, calling it “pro-people” while emphasising on the need to know the revenue losses suffered by states because of the move. “Because, ultimately, if a state suffers any loss, then it boils down to the sufferance of the common man. The GST Council will discuss the rate proposal item by item.”
An tax expert said GoM’s recommendations will simplify the tax structure, reduce disputes on classification of products and also boost consumption. “Since more than 70% GST collections come from 18% slab (which is not proposed to be changed in general) the revenue impact of GST cuts may be limited, particularly because reduced prices will also spur demand,” he said.
He also advised industry to be prepared for the changes, which he termed GST 2.0. “Given the speed with which things are moving, industry needs to quickly gear up and assess the impact as timeline for transition plan is really steep.” .
