MUMBAI: The proposed GST reforms, announced by the prime minister to be rolled out by Diwali, halving the current four-rate tax structure into two-tier regime at lower rates, though will lead to an estimated average revenue loss of Rs 85,000 crore per annum, will give a big boost to the for-long sagging consumption story to the tune of Rs 1.98 trillion, a report has said.
The current GST structure consists of four main rate slabs: 5, 12, 18 and 28%. These rates apply to most goods and services. In addition to these main slabs, there are three special rates as well: 3% on gold, silver, diamond & jewellery; 1.5% on cut & polished diamonds, and 0.25% on rough diamonds. That apart, there is also a GST compensation cess on select goods such as tobacco products, aerated drinks and motor vehicles at varying rates.
This cess is used to compensate the states for any revenue loss resulting from the transition to the GST system. But the irony is that when the Centre lobbied the opposition ruled states which were not keen on losing taxation powers, the biggest USP was a one-nation-one-tax indirect taxation regime but which got implemented because such a multi-layered levy structure.
The Centre has proposed the new goods and services tax (GST) rates with just two slabs of 5 and 18% by removing the 12 and 28% rates based of classification of items as ‘merit' and 'standard'. Also, a 40% tax will be levied on five to seven select items, including demerit goods like pan masala and tobacco.
"The proposed GST 2.0, while also involving an average revenue loss of Rs 85,000 crore per annum, is estimated to boost consumption by Rs 1.98 trillion," Soumyakanti Ghosh, the chief economic advisor to SBI, said in a research note. “For the current fiscal, the loss to revenue is estimated at Rs 45,000 crore assuming the period of new tax rates coming into force from October,” he added.
Taking together the benefits of income tax tax rate cuts announced in the Budget for the current fiscal, the combined impact of both measures amounts to an additional Rs 5.31 trillion of consumption boost. This translates into around 1.6%, he said. According to Ghosh, the effective weighted average GST rate has already come down from 14.4% at the time of inception in July 2016 to 11.6% by September 2019.
Given the current rate rationalisation, we believe that effective weighted average GST rate may come down to 9.5%.More importantly, the likely consumption boost of Rs 1.98 trillion, though will give a 0.6% increase in GDP, will not stoke inflation as taxes on mass consumption items are going to go down in the proposed GST regime.
“Overall, we believe retail inflation may be moderated in the range of 20-25 bps,” the chief economic advisor to SBI, Sumyakanti Ghosh said in the report.This is because, he says as GST rates on essential items like food, cloth, etc is expected to decline from 12 to 5%, and the CPI inflation in this category may also come down by 10-15 bps after considering a 60% pass through effect on food items.
Apart from this, the rationalisation of GST rates of services also leads to another 5-10 bps reduction in CPI inflation on other goods and service items, considering a 25% pass through effect. The Centre's proposal will be discussed by a panel of state finance ministers this Wednesday and Thursday. Once approved, it would be placed before the GST Council in its meeting next month.