What is the need to rationalize GST rates? Can we expect the rate to reset this year?

What is the need to rationalize GST rates? Can we expect the rate to reset this year?

The story so far : The GST system, set to complete five years in July, is due to an overhaul of tax rates levied on different products due to structural anomalies and the reduction of multiple tax slabs. A ministerial group from the GST Board, under the leadership of Karnataka Chief Minister Basavaraj S. Bommai, was tasked last September to suggest immediate changes, as well as a roadmap for short and medium term changes in the structure of GST. GST rate. The Group of Ministers (GoM) has not yet concluded its deliberations.

What is the need to rationalize GST rates?

From a business perspective, there are simply too many tax rate brackets, compounded by aberrations in the duty structure along their supply chains, with some inputs being taxed more than the end product. There are five general tax rates of zero, 5%, 12%, 18% and 28%, with tax levied above 28% on certain “sinful” goods. Special lower rates are levied on items like gemstones and diamonds. Tax experts have pointed out that these are far too many rates and not necessarily a good and simple tax.

For the government, the top priority, apart from simplifying the tax structure in hopes of boosting compliance, is to raise more revenue, as they believe collections have been disappointing. At the last full meeting of the GST Council, Finance Minister Nirmala Sitharaman pointed out that the new indirect tax system was based on a revenue-neutral tax rate of 15.5%, but that revenue actual taxes have continued to decline, bringing the effective tax rate to 11.6%. % “Knowingly or unknowingly, [the rate] has been reduced by reducing the tax rates of certain items,” the minister said. Some of these frequent rate cuts were approved by the Board on the eve of critical elections.

The need to shore up revenue was also flagged, as the clearing period assured for states under the GST pact expires on June 30, so their fiscal space will depend on actual recoveries thereafter. The Board has set up two GoMs to address this issue – one to look at more technologies and programs to improve tax compliance, and another under Mr. Bommai to streamline tax rates to correct the anomalies and consider merging different tax bands.

Haven’t GST revenues reached new records?

Yes, they did – GST revenues hit new highs in three of the first four months of 2022, topping ₹1.67 lakh crore in April. The government calls this a sign of economic recovery and a reflection of measures to crack down on tax evaders, but there is another key factor: the breakneck pace of rising prices. Wholesale price inflation, which captures producer costs, has been above 10% for more than a year and peaked at 15.1% in April. Inflation facing consumers on the ground hit a nearly eight-year high of 7.8% in April. In a recent note, Ambit Capital analysts Sumit Shekhar and Eashaan Nair pointed out that the increase in GST revenue “should not be confused” with an increase in consumption which is only 2%. above pre-pandemic levels. Rising prices, they said, were “the single most important factor in the rise in tax inflows”, with increased imports, compliance adjustments and a boom in consumption of big ticket items even then. that mass consumer goods and services languish.

Can we expect the rate to reset this year?

Ambit said a hike in GST rates is “almost certain” this year to ensure collections continue high and states get enough money from July. But any changes and mergers in GST rates will lead to higher taxation of certain products, with concomitant ripple effects on prices. “The Center and the States are aware of the desperate need to streamline the bands and the rate structure, but we just have to find the right time. When inflation is the main concern, whether the Council is ready to tackle it is a key question,” a senior government official said. The Board has been aware of the need to rationalize rates since at least 2019, but has postponed action every year due to macro-level constraints – starting with the slowdown in growth in 2019-20, followed by the start of the pandemic and the nascent recovery in 2021-22. With inflation, largely imported through more expensive fuels, commodities and groceries, expected to remain high throughout the year, hopes for a GST rate reset look dim in 2022-23. Even if the conflict in Europe eases or ends, its consequences in the form of sanctions as well as other supply chain disruptions could persist and keep prices high in 2023-24 as well. This may mean an even longer wait for a simpler GST scheme, especially since tax hikes are unlikely to be a tasty option before the 2024 general election.