In September last year, the GST Council had tasked a group of ministers to look into the contentious issue of rate rationalisation. The GoM, headed by Karnataka Chief Minister Basavaraj Bommai, was also expected to examine the issue of the inverted duty structure and review the list of goods that were exempted from the tax. The rationale for setting up the committee was straightforward — to expand the tax base and boost revenues. While GST collections have improved of late — collections touched an all-time high of Rs 1.42 lakh crore in March — on the whole, they have fallen short of expectations. And considering that GST forms a substantial part of general government tax revenue, lower than expected collections have fiscal implications at both the central and state levels. For states which are unlikely to have the cushion of revenue garnered through the compensation cess after June this year, the situation will be particularly challenging in the absence of a significant pick-up in overall collections.
The lower than expected collections can, in part, be attributed to issues of compliance, and lower tax rates. While, over the years, the GST Council has taken steps to not only address the administrative issues, but also to also raise compliance levels, the tax rates levied continue to remain lower as compared to those under the earlier regime. As per a report by the RBI, the weighted average GST rate fell from 14.4 per cent at the time of inception to 11.6 per cent in 2019 as a consequence of a series of tax cuts between November 2017 and December 2018. To put this in perspective, the Subramanian Committee report had estimated the revenue neutral rate at 15.5 per cent.
Considering the current rate structure — there are several rates, ranging from zero to special rates for diamonds and jewellery, the standard rates of 5 per cent, 12 per cent and 18 per cent and the top rate of 28 per cent — several suggestions have been made to simplify the rate structure and achieve revenue neutrality. These range from reducing the exemptions given to merging the 12 per cent and 18 per cent slabs to raising the 5 per cent slab to 8 per cent. As per reports, the GST Council in its meeting next month is likely to delve into these issues. While the Council should consider aligning the rates to pre-GST levels, it should be guided by the objective of streamlining the multiple rate structure, reducing the slabs. The situation has, however, been complicated by the recent surge in inflation. Retail inflation, as measured by the consumer price index, rose to 6.95 per cent in March, and is unlikely to subside quickly. Thus, rather than opting for a one-time adjustment to the rate structure, perhaps a more prudent approach would be to opt for a phased recalibration.
This editorial first appeared in the print edition on April 27, 2022 under the title ‘Calibrate the rate’