GST Council may take up rationalising tax rates, slab merger in next meet

15th Finance Commission has suggested merging 12 and 18% tax rates

The next Goods and Services Tax (GST) Council meeting in March will likely take up rationalising tax rates and mergers of multiple slabs to bring them close to being revenue-neutral and make the indirect tax regime simpler.

The meeting, whose date is yet to be set, will come at a time when the 15th Finance Commission has recommended merging the 12 and 18 per cent tax rates.

On Wednesday, Prime Minister Narendra Modi expressed the government’s resolve to bring natural gas under GST.

However, officials said any such proposal depended on the approval of the states because some of them including Andhra Pradesh are opposed to the idea.

“The next GST Council meeting will take place in March. We will discuss with the Council members and try to take up the issue of slab mergers and correcting the inverted duty structure in the meeting,” said a senior Central Board of Indirect Taxes and Customs (CBIC) official.

Besides the merger of the 12 per cent and 18 per cent slabs into a standard rate, the 15th Finance Commission, headed by N K Singh, has suggested rationalising GST into a three-rate structure, comprising a 5 per cent merit rate and 28-30 per cent de-merit rate.

“We realise that our GST rates are lower than the revenue-neutral rate. The Council will take a final call on what the rationalised slabs should be. The aim will be to make the structure clean, besides improving revenues. The potential of monthly GST revenue collection is Rs 2 trillion,” said the official.

GST revenues touched a record high of Rs 1.19 trillion in January and Rs 1.15 trillion in December on the back of improved economic activities and enforcement.

In the view of the 15th Finance Commission, the effective tax rate under GST stands at 11.8 per cent according to the International Monetary Fund and 11.6 per cent according to the Reserve Bank of India.

These rates are considerably lower than 14 per cent, the average revenue neutral rate (RNR) required for a smooth transition from the value-added tax regime without any revenue loss.

While GST’s potential is to generate revenue at 7.1 per cent of GDP, at present it is 5.1 per cent, which translates into a revenue loss of Rs 4 trillion, the Commission report notes.

“With GST collection stabilising over the past few months, there is a need to begin discussion on rationalising slabs and plan fewer slabs. This will help in reducing complexity and benefit many businesses,” said M S Mani, partner, Deloitte India.

Punjab has recommended two slabs.

Currently, GST has four slabs -- 5, 12, 18 and 28 per cent. Over the peak rate, there is a cess on demerit items and luxury goods. Besides, bullion is taxed at less than 5 per cent.

Kerala Finance Minister Thomas Isaac has been batting for an upward revision in GST rates to ensure states don’t face a revenue shortfall once they stop getting compensation after June 2022.

Meanwhile, the government is looking at correcting the inverted duty structure in certain items such as textiles, footwear, and fertiliser. The decision on this was deferred in June last year due to the pandemic. The council had to correct the inverted duty structure on mobile phones and specified parts by increasing the rate to 18 per cent from 12 per cent. An inverted duty structure arises when the rate on inputs is higher than that on final products.

As for rationalising rates, key suggestions compiled by the fitment panel last year included hiking rates on precious metals from 3 per cent to 5 per cent, taxing higher segments of education and health, and revisiting rates on certain items that went down from 28 per cent to 18 per cent. The Centre had also examined raising the 5 per cent slab to anywhere between 6 per cent and 8 per cent and doing away with the 12 per cent slab. However, it did not formalise the proposal due to opposition from several quarters. The fitment panel had also examined hiking the rate for certain items at 5 per cent to 12 per cent, and those in 12 per cent to 18 per cent.

Although Modi has expressed the government’s commitment to bring natural gas under GST, states have been resisting the move. According to estimates, states earn about Rs 6,000 crore in revenue from natural gas with most of it concentrated in Gujarat, Maharashtra, and Uttar Pradesh.

Andhra Pradesh had in a letter to the chairman of the GST Council last year said that the state got a revenue of Rs 5.23 bn on sale of Natural Gas during the year 2017-18, and how bringing it into the GST ambit would severely impact its revenues.

The use of natural gas is concentrated in only 8-10 states.

On the insistence of states, petroleum has been kept out of the GST and, hence, continues to face a cascading effect of multiple taxes. However, certain petroleum products such as cooking gas, kerosene and naphtha are part of the GST.While crude oil, diesel, petrol, natural gas and ATF do not attract the GST, these are used as inputs in the petrochemical, fertiliser and transport industries and this leads to a cascading of taxes. Naphtha and liquefied petroleum gas are included in the GST.