The rationalization of the goods and services tax (GST) structure into three slabs by merging two existing slabs is on the cards, and progress should be seen soon, chief economic adviser in the finance ministry Krishnamurthy Subramanian said on Thursday.
“It’s something that is definitely going to happen. The three-rate structure is definitely important. Even the inverted duty structure that is there is equally important to actually fix. The government is definitely seized of the matter. You should hopefully see traction on that soon,” Subramanian said at an event organized by industry body Assocham.
The original plan was to have a three-rate structure of GST, Subramanian said. “However, what we have to be very cognizant about is that often with policymaking, you don’t want perfect to become the enemy of excellent. GST, the way it got created with five rates, was basically an excellent move because now we are seeing the amounts that are coming in. The policymakers must be given credit for being practical enough to say, ‘let’s get it going first’,” he said.
India has four primary GST rates of 5%, 12%, 18%, and 28%. There is also a cess on luxury and demerit goods such as automobiles, tobacco and aerated drinks. On precious stones and metals, special rates of 0.25% and 3%, respectively, are applicable.
A proposal to merge the 12% and 18% slabs into a single rate has been discussed ifor several years. However, no final proposal on this has been made at the GST Council, which will take a call on it.
If the council approves the merger of the two rates, items such as ghee, butter, cheese and spectacles may become expensive, while soap, kitchenware and apparel may become cheaper.
In its report tabled in Parliament earlier this year, the 15th Finance Commission (FFC) urged restoring the “rate neutrality of GST”, which was compromised by rate cuts.
“Restoring revenue-neutral rates will mean merging the rates of 12% and 18% and operating with a three-rate structure of a merit rate, a standard rate, and a demerit rate of around 28% to 30% and minimizing (tax) exemptions,” said the FFC report, which recommended the ways of sharing Centre’s tax revenue with states for 2021-26.
Former finance minister Arun Jaitely had called for merging the two slabs. “A road map could well be to work towards a single standard rate instead of two standard rates of 12% and 18%. It could be a rate at some mid-point between the two. The country should eventually have a GST that will have only slabs of zero, 5% and a standard rate, with luxury and sin goods as an exception,” Jaitley had written in a December 2018 blog. He died in August 2019.
“If the GST slabs of 12% and 18% are merged to form a new slab somewhere in between, the tax burden on items currently in 12% slab will go up. It remains to be seen how businesses and consumers will respond to this change. On the other hand, tax on items currently at 18% will come down, which is an upside for consumers,” said Abhishek Jain, tax partner, EY India.
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