GST Rate Revisions in India – Key Developments and Impacts

The Goods and Services Tax (GST) Council of India is set to make adjustments to GST rates. This initiative aims to address current industry dynamics while ensuring revenue neutrality. The goal is to simplify tax rates and enhance revenue collection, especially in light of potential cuts to health and life insurance premiums. The latest round of rate rationalisation is expected to affect around 150 items.

Background of GST Rate Rationalisation

Introduced in 2017, GST has undergone multiple revisions. These changes aim to streamline the tax structure and promote ease of doing business. The latest recommendations come from a six-member Group of Ministers (GoM) tasked with reviewing GST rates. The objective is to align tax rates with current consumption patterns.

Proposed Changes in GST Rates

The GoM has recommended altering tax rates for various goods. For instance, readymade garments priced below Rs 1,500 may see a reduction from 12% to 5%. Conversely, garments priced between Rs 1,500 and Rs 10,000 could increase from 12% to 18%. Additionally, rates on packaged drinking water and bicycles are proposed to drop to 5%. High-end wristwatches and shoes may face increases to 28%.

Revenue Implications of Rate Changes

The proposed rate rejig could generate an additional Rs 25,000 crore annually. This revenue will be shared between the Union and state governments. However, potential reductions in GST rates on health and life insurance premiums may offset these gains. Currently, health and life insurance premiums attract an 18% GST, contributing to revenue.

Challenges of Revenue Neutrality

Achieving a revenue neutral rate (RNR) remains a challenge. The RNR is the tax rate at which the government maintains revenue levels despite changes in tax laws. Since GST’s inception, the average tax rate has decreased. The finance minister noted that the current GST rate is below the originally suggested RNR of 15.3%.

Future of GST Slabs

The council is not expected to discuss merging GST slabs in the upcoming meetings. States have expressed concerns about potential revenue losses. However, a three-tier GST structure has been proposed. This would replace the current four-slab system with rates of 9%, 18%, and 27%.

Current GST Revenue Trends

In FY24, gross GST collections reached Rs 20.14 lakh crore, marking an 11.7% increase from the previous year. The distribution of GST rates shows that 70-75% of collections come from the 18% slab, while the 28% slab contributes 13-15%. The lower slabs (5% and 12%) account for a smaller portion of total revenue.

Conclusion on Rate Rationalisation

The ongoing efforts to rationalise GST rates reflect the government’s focus on enhancing compliance and simplifying the tax structure. As the council deliberates on these changes, the impact on various sectors and overall revenue collection will be closely monitored.

Questions for UPSC:

1. Critically analyse the impact of GST on small businesses in India.
2. Estimate the potential economic effects of merging GST slabs on revenue generation.
3. Point out the challenges faced by the GST Council in maintaining revenue neutrality.
4. With suitable examples, explain how changes in GST rates can influence consumer behaviour.

Answer Hints:

1. Critically analyse the impact of GST on small businesses in India.

1. GST has simplified tax compliance, reducing the burden of multiple state and central taxes.
2. Small businesses benefit from input tax credit, which can lower their overall tax liability.
3. However, the increased compliance costs and need for accounting systems can strain resources.
4. Some small businesses face challenges due to higher GST rates on certain goods, affecting pricing.
5. Access to the formal market has improved, enabling small businesses to compete better against larger firms.

2. Estimate the potential economic effects of merging GST slabs on revenue generation.

1. Merging GST slabs could simplify the tax structure, reducing compliance costs for businesses.
2. It may lead to a more stable revenue collection by minimizing tax evasion and confusion.
3. However, it risks reducing revenue from higher tax brackets if lower rates attract more consumption.
4. States reliant on higher slab revenues could face budgetary pressures, affecting public services.
5. Overall, the impact would depend on the specific rates set and consumer response to changes.

3. Point out the challenges faced by the GST Council in maintaining revenue neutrality.

1. Achieving revenue neutrality is complicated by fluctuating economic conditions and consumption patterns.
2. Potential rate cuts on essential goods like health insurance can lead to revenue losses.
3. Political pressures from states to maintain or increase revenues complicate consensus on rate changes.
4. Administrative challenges in monitoring compliance and preventing tax evasion persist.
5. Changes in consumer behavior in response to tax adjustments can unpredictably affect revenue collections.

4. With suitable examples, explain how changes in GST rates can influence consumer behaviour.

1. Lower GST rates on essential items, like packaged drinking water, can increase consumption due to affordability.
2. Increased rates on luxury items, such as high-end wristwatches, may deter purchases, shifting consumer preferences.
3. Changes in rates can lead consumers to stock up on goods before anticipated price hikes, altering buying patterns.
4. For instance, a reduction in GST on readymade garments may lead to increased sales, benefiting retailers.
5. Overall, consumers are likely to adjust their spending based on perceived value and tax implications on products.