GoM clears GST 2-slab overhaul, revenue loss in focus

The simplification of India’s goods and services tax (GST) structure took a significant step forward with the group of ministers (GoM) on rate rationalisation unanimously accepting the Centre’s proposal to move to a twoslab structure of 5% and 18% with a special 40% levy for sin goods, paving the way for next-generation reforms in the country’s eight-year-old indirect tax regime.

The GST Council, the apex decision-making body for the tax, could meet in the first week of September instead of the second half of next month as planned earlier, to ensure early implementation of the reform in time for Diwali, people familiar with the matter said.

The GoM, chaired by Bihar deputy CM Samrat Chaudhary, approved the Centre’s proposal to abolish the 12% and 28% rates, shifting goods to the 5%, 18% and 40% slabs. The proposal was unanimously accepted by the six members present —three each from states ruled by the BJP and the opposition—as they all favoured giving relief to the people. All states want ultra-luxury cars and high-end products in the highest slab of 40%.

However, some states also wanted the Centre to assess the revenue loss to states due to the reform and ways of compensating them, something they said was missing in the Centre’s proposal.

“Both the proposals of the Centre have been accepted by the GoM on rate rationalisation,” Choudhary told reporters after the meeting. The GST Council, which set up the GoM, will discuss the reform proposals item by item at its meeting.

Prime Minister Narendra Modi had announced the plan to reform GST during his Independence Day address on August 15, calling it a Diwali gift. A revamped GST is expected to lower prices, boost consumption and drive economic growth amid global economic uncertainty.

Revenue concern
The biggest concern for states is the revenue loss on account of the changes and the absence of a mechanism for compensation as most of them depend heavily on GST revenue.

A recent SBI research report suggested that the Centre’s GST reform proposal could cost Rs 85,000 crore to the exchequer annually. The Department of Revenue will conduct an assessment of revenue loss that will be presented to the GST Council.

“We have said we are okay with any rate rationalisation proposal, which is pro-people, but we should also know the revenue loss that we are going to suffer,” West Bengal finance minister Chandrima Bhattacharya said. “Because, ultimately, if a state suffers any loss, then it boils down to the sufferance of the common man.”

She suggested amending the GST law to allow imposing a levy over and above the 40% permissible rate, to maintain overall tax rates on these products once the compensation cess ends. Other opposition states supported that view.

Telangana deputy chief minister Mallu Bhatti Vikramarka said rate rationalisation must be balanced by ensuring that revenues of the states are protected. Otherwise, welfare schemes meant for poor people and the middle class will be hit as will infrastructure projects, he said. He suggested that the GST rate on sin or luxury goods be increased to current levels and the additional amount collected be given to the states.