In a discussion with CNBC-TV18, Pratik Jain, Partner at PwC India, acknowledged the complexity of merging tax slabs, especially when revenue considerations are at play. He pointed out that although the government aims for a revenue-neutral rate of around 15%, the current effective GST rate is approximately 11.5%.
Jain believes that merging the 5% and 12% slabs into a single rate, such as 7% or 8%, may be more feasible than combining the 12% and 18% slabs. He noted that a significant portion of GST revenue comes from the 18% slab, and reducing this rate would be challenging to offset through adjustments in other categories. “Merging slabs will take time and will be a carefully balanced exercise,” said Jain, highlighting that items taxed at the 5% rate, such as medicines and real estate, are critical to consumers, further complicating the process.
Najib Shah, former Chairman of the CBIC, concurred with Jain, stating that collapsing tax slabs would be a gradual process. He emphasised the political challenges associated with such a move, particularly when the 18% slab accounts for a significant portion of GST revenue.
Shah argued that any downward revision of the 18% rate would need to be compensated by an upward movement of the 12% rate to ensure revenue neutrality. While he acknowledged that the tax administration would welcome fewer rates, Shah stressed that these decisions are heavily influenced by political considerations and will take time.
MS Mani, Partner at Deloitte India, noted that now might be the right time to rationalise tax rates. He emphasised that GST collections are robust, and the legislation has stabilised over the past seven years. According to Mani, reducing the number of slabs is essential, but the structure must still account for the varying consumption patterns across different income groups.
He also raised concerns about the future of the compensation cess, which was originally introduced for a limited period but extended due to the pandemic.
In addition to tax slab rationalisation, the GoM discussed the proposal to exempt health and life insurance premiums from GST. This exemption, if implemented, could lead to a revenue loss of approximately ₹3,500 crores for the government. The GoM also considered imposing a 5% GST on commonly used food items while maintaining higher rates on luxury goods and products that pose health risks. These discussions, however, concluded without definitive decisions, and the GoM plans to reconvene in October to further assess the revenue implications and weigh the pros and cons of these proposals.
Below is the verbatim excerpt of the discussion.
Q: When it comes to the rationalisation of tax rates, merging tax slabs, and reducing the number of slabs, there has been discussion on this for the last six years. This has been a key industry ask. Do you think now, at a time when we are seeing a tremendous surge in GST revenues, is the time to reduce the number of slabs from four to three?
Mani: I completely agree—there is no time like the present because the collections are robust, the GST legislation has settled down and compliances have settled down. It’s been seven years in the making and now it’s certainly time to reduce the number of slabs. Having said that, the number of slabs that we have, are very high.
What we have to bear in mind is that the reason why there are several slabs is because, being an indirect tax, the rate of tax has to be taken together with the consuming class. Products that are consumed by weaker sections of society need to be taxed at a lower rate because any GST added to the price of the product immediately leads to an inflationary spiral. Keeping that in mind is why we have 5%, 12%, 18% and 28%, and we also have a compensation cess on top of the 28%. Bringing them down to three slabs is certainly necessary.
In addition, I would also be very happy to see some kind of clarification to businesses that are impacted by the compensation cess because this was originally intended to be for a limited period. It got extended because of the collection reduction during the pandemic period and now it’s there till 2026. But what happens after that? Businesses will need some time to plan.
Together with the rate rationalisation and in terms of reducing the slabs, it would also be good to see some kind of directional clarity on how long we are going to have the compensation cess or whether some of the products which suffer compensation cess today can be brought down to the 18% slab.
Q: Regarding state revenues, this is a significant concern. How can the GoM and authorities work on merging tax slabs, for example, the 12% and 18% slabs, without hurting state revenue? The GoM has sought clarity on this from various officials. What balancing act can realistically be achieved?
Jain: It’s going to be a difficult exercise. Two, three things that are important. One is the government has said that the revenue-neutral rate in the GST was supposed to be around 15%. Right now, the effective rate is around 11.5% or so. That means the rate is much lower than the revenue-neutral rate. Point number two, the GST collection, while it has gone up, I think, last two, three months, it is perhaps a tad lower than what the expectation was. And the tax-to-GDP ratio in the country needs to be increased.
Now, if you look at all of that and also look at the simplification needed from four slabs to three slabs, definitely something needs to be done. I think that merging 5% and 12% into a single category, let’s say a 7% or 8% rate, perhaps is much more doable than merging 12% and 18% into a single category. The reason I say so is that a large proportion of the current GST collection is at 18%. And if 18% reduces, then the revenue shortfall that you’ll have will be very difficult to meet by increasing some of the products under 12% to that rate.
While both the possibilities do exist, that 5% and 12% get merged to let’s say a single rate of 7% or 8% or 12% and 18% could merge into a single rate of 15% or 16%, I see the possibility of 5% and 12% merging is perhaps an easier one. That is also perhaps not as easy because a lot of items at 5% are very critical like medicines, like real estate, like restaurants. What will be the impact of that if it increases to 8%? Either way, I think it will be a very difficult or carefully balanced exercise that has to be done. I think it will take some time. It’s not going to happen in the next 2-4 months. It’s going to be deliberated over some time.
Q: In your recent piece on CNBCTV18.com, you mentioned that collapsing slabs is challenging and won’t happen soon. Do you think this is something that can actually happen, or will the idea of reducing the number of slabs take longer?
Shah: I think it’s going to take longer. It’s not going to be an easy task for the GoM because revenue considerations are always in the back of the mind. From the tax administration’s point of view, I can assure you, they’ll be delighted if the number of rates are reduced. And it’s going to be a call that is entirely political. The reason why I say it is challenging, for instance, 12% and 18%, where are you going to put the rate at 15%?
That would mean you’re going to have a lot of upward movement as much as downward movement. And remember, 18% is the slab, which gives the bulk of the revenue. Every such downward revision will have to be more than offset with the 12% to 15% upward movement.
Revenue has always been a major consideration. Otherwise, we would have had a common slab, we would have had one slab. I think it’s going to take some time. The very fact that the GoM is deliberating again very shortly, the very fact that no consensus could be reached on multiple issues, would suggest that it is going to take some time. The sooner it happens, the better. I think that’s the general tone of everybody from the industry. So the sooner it happens, the better.
Watch the accompanying video for the entire discussion.