The GST Council’s 56th meeting was extraordinary in many ways. A contentious issue like rate rationalisation was expected to face stiff resistance; but perhaps for the first time in the council’s history, the member states unanimously agreed to reduce tax rates in just one sitting.
India will now have a two-slab GST, which is essentially three rates including two merit rates of 5 percent and 18 percent, and one de-merit rate of 40 percent on ‘sin’ and luxury goods. The changes, billed as the biggest reform since GST’s launch, will roll from September 22, coinciding with Navratri.
The 5 percent rate mostly covers everyday essentials, which means households’ monthly consumption expenditure burden will further ease, while electronics, automobiles, earlier taxed at 28 percent, will now attract 18 percent and should boost discretionary spending. Finally, life and health insurance policies will no longer attract GST, though the onus lies with insurers to pass on the benefit to consumers.
Clearly, GST reforms are expected to deliver a consumption booster. First, inflation may ease 25 basis points, while growth may see a 100-120 bps upside. Along with the interest rate cuts and personal income tax cuts, private consumption should fare better.
Meanwhile, the official estimate pegs a revenue loss of Rs 48,000 crore due to the GST rate cuts; private estimates of the loss vary widely between Rs 50,000 crore and Rs 2.5 lakh crore. What’s puzzling is whether the Centre has agreed to compensate the states. Such an assurance was a key demand of the opposition-ruled states for backing the proposal.
However, there is no official word yet on the revenue protection framework. Moreover, GST cess will expire next March, which means the Centre’s revenue will be hit.
Brokerages have warned that without capital expenditure cuts, the fiscal deficit will widen by about 40 bps; so, any revenue forgone would effectively have to be made up through other revenue streams or expenditure rationalisation.
Besides rates, the council’s other significant reform is help with the troublesome inverted duty structure and faster refunds, with businesses getting 90 percent of their refund claims upfront starting November 1.
While the thorny issue of input tax credit is not entirely eliminated, compliance processes are being relooked to ensure easier compliance. Another helpful step was the council agreeing to operationalise the Goods and Services Tax Appellate Tribunal, which was announced in 2017 but is yet to hit the ground.