Only 3 GST slabs? - Rationalisation of GST Rates
- finminati
- Jul 31, 2021
- 3 min read
Updated: Jun 12
On 29th July 2021, Krishnamurthy Subramanian (Chief Economic Adviser, Finance Ministry) said that rationalisation of the Goods and Services Tax (GST) structure into three slabs is on the cards.
Before understanding the proposed change, its need and implications, let us first understand briefly, the current GST structure in India.
Current GST Structure in India:
WHAT IS GST?
Goods and Services Tax (GST) is an indirect tax used in India on the supply of goods and services. It came into effect on 1st July 2017. It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
CURRENT GST LEVY RATES:
Currently, India has 5 primary GST rates: 0%, 5%, 12%, 18% and 28%.
On top of that, additional cess is levied on some luxury and demerit/sin goods such as automobiles, aerated drinks and tobacco.
On precious stones and metals, special rates of 0.25% and 3%, respectively, are applicable.
Rationalisation of GST Slabs
The government has been in discussions about implementing the 3 slab system by merging the 12% and 18% slabs into a single rate. While the same has been in discussion for several years, no proposal for the same has yet been made at the GST Council.
BUT WHY IS THIS CHANGED REQUIRED?
As on 30th June 2021, actual average GST rate is around 11.8%, against planned revenue neutral rate* of 15.5%. The tax revenue shortfall or the affect on rate neutrality of GST has been due to:
excessive number of tax slabs
tax rate cuts during GST implementation
Operating with a three-rate structure of merit rate, a standard rate & a demerit rate of around 28% to 30% and minimising tax exemption would help restore revenue neutral rates.
[* It is the rate of tax that allows the Government to receive the same amount of money despite changes in the tax laws]
The Indian GST structure was originally meant to have three slabs only, however, as Subramanian explains it, policy making is a complex process and introducing the system with 5 slab rates was an excellent move as it allowed for the GST regime to at least be implemented and it has subsequently helped increase in the tax collection.
Former Finance Minister of India, Arun Jaitley, had written in a December 2018 blog, calling for merger of 12% and 18% slab rates, and suggested that India should eventually have a GST system that will only have slabs of 0%, 5% and a standard rate, with luxury and sin goods being an exception.
IMPACT
The aforementioned merger / change would ultimately result in an increased tax burden on items under 12% bracket (such as ghee, butter and cheese). It is uncertain how businesses and consumers would respond to such a change.
But on the other hand, items covered under 18% GST tax bracket would become cheaper (such as soap, apparel and kitchenware); which is an upside for consumers as well.
What are your opinions about this proposed change? Comment down below!
DISCLAIMER
The content is for informational and news reporting purposes only, and readers should not rely on it for professional advice or take it as a definitive source of truth. This news is solely for educational purposes.
The securities / investments quoted here are not recommendatory. It is not to be used or considered as financial or investment advice, a recommendation, an offer to sell, or a solicitation to buy any securities or other financial assets. Any similarity / overlap between the securities, stocks, or assets mentioned in the blog post / website / social media handles and those personally owned is purely coincidental, meaning it is not intentional or planned.
This post might contain links to external websites that are not provided or maintained by or in any way affiliated with the website / blog.
Comments