Sources say, “the Group of Ministers on Rate Rationalisation has discussed the proposal to move to a 3-slab structure. The proposal is to merge the 12% and 18% slabs, but the panel has sought a detailed revenue analysis on the impact of this move, based on which the panel will hold further discussions.”
The GoM on rate rationalisation met in Goa on September 25. It is chaired by Samrat Choudhary, Deputy Chief Minister of Bihar, and includes member states such as Karnataka, Uttar Pradesh, Rajasthan, West Bengal, and Kerala. Officers from the tax research unit of the Union finance ministry are assisting the panel with secretarial work.
“The GoM is conscious of protecting the revenue interest of the states and thus wants to conduct a detailed analysis before it makes any recommendations to the GST council,” sources added.
The intent of the GoM is clear: it wants the current rate framework under GST to be overhauled only if the changes do not burden consumers.
CNBC-TV18 has learnt that opposition-ruled states like Kerala, Karnataka, and West Bengal, which are part of the GoM, were not in favor of the proposal to merge the slabs.
“Kerala, Karnataka, and West Bengal voiced serious concerns over the proposal to merge the slabs. The states believe that the current four-tier structure should continue, but the GoM can consider a commodity and service-wise rate rejig,” sources noted.
To move forward with the rate rejig, the GoM has tasked officers with providing a detailed revenue analysis.
The GoM feels that the last significant overhaul of rates for goods and services occurred in November 2017 and again in 2018, after which no major exercise has taken place. A reevaluation of many goods and services under the current slabs is thus warranted.
So, which goods and services might see different rates soon?
Well, sources say that “the GoM is in favor of moving all commonly used food items under the 5% tax bracket to ensure that common people benefit from a reduced tax burden. Similarly, a small bottled water container, currently taxed at 18%, should be brought down to 5%.”
“Not just food items, but other daily use items for the common man should be kept in the lowest 5% bracket, such as textbooks, exercise books, pencils, and more,” sources added.
In addition, the GoM favours hiking rates on goods and services that are rarely used by the common man. It is also of the view that some items should retain their current rates.
“The GoM also discussed that rates on footwear and apparel should not change, nor should rates on hotel stays. However, rates on beauty products, such as hair dryers, may be considered for a hike as they are not daily use items. A bindi and kajal, however, should remain in the current slab,” sources said.
Regarding hikes, the GoM’s ideology is that goods and services deemed luxury items or that pose health hazards can have their rates increased.
On the contentious issue of whether GST should be exempted on life and health insurance premiums, sources revealed, “the GoM favours exempting GST on health and life insurance premiums. As presented by the fitment committee earlier, this could mean a revenue hit of ₹3,500 crore.”
“To make up for this revenue loss, the GoM has tasked officers to study how this loss can be recovered in the existing framework of GST. Can some rates be hiked to compensate for these losses, so that the state interest is protected and the hike doesn’t burden the consumers?” sources added.
The GoM is slated to meet next in Delhi on October 19 and 20.
Samrat Choudhary, Deputy Chief Minster of Bihar and Convenor of the GoM on rate rationalisation told CNBC-TV18 on Wednesday that the “GoM did not take any decisions. The GoM has decided to meet next on October 19 in Delhi. The October 19 meeting will specifically focus on discussions regarding GST rate cuts/exemptions on health and life insurance premiums, with another meeting on October 20 to discuss other rate issues.”
According to Niraj Bagri, Partner, Dhruva Advisors, “The GoM meeting is held to discuss rate rationalisation of GST rates. Since its introduction, GST has had a four-tier structure 5%, 12%, 18% and 28% (excluding precious metals and compensation cess). The debate is whether it can be reduced to a three-tier structure and one of the possibilities could be collapsing 12% and 18% to a single rate. Whilst it is advantageous for the 18% bracket, it could imply goods/services in the 12% bracket move to a new higher rate or to a 5% rate.”
“The current effective rate of GST is at 12% as against the revenue neutral rate of 15.3%. It would be a tough balancing act to ensure simplicity without compromising on revenue collection. A few other possibilities could be altering the other rates of 5% and 28% and arriving at a three-tier rate which does not result in revenue shortfall. There are no easy solutions, and it would be interesting to see whether the anti-profiteering provision which was expected to be phased out would get a new lease of life if there were significant rate changes intended to be carried out,” Bagri said.
It remains to be seen whether the GoM will be able to produce a detailed report for the council to consider in its 55th meeting, likely to take place in November 2024.