The 54th Goods and Services Tax Council meeting scheduled for Monday is expected to take on the much-awaited rationalisation of tax rates. The council is also expected to consider the contentious issue of 18 per cent GST on life and health insurance premiums, which has drawn the ire of a wide section of Indians.
Last month, the council’s fitment panel was reported to have suggested options ranging from lowering the rate to removing GST on the premiums altogether. It should not wait any longer to act, as either option would make insurance products more affordable, which is the need of the hour. As for rate rationalisation, several states have expressed concern over revenue losses; it remains to be seen if any meaningful progress on this is possible in the short term.
Last month, the Group of Ministers suggested continuing with the current structure that includes five rates—0, 5, 12, 18 and 28 per cent, besides cess levied on ‘sin goods’.
In the past, there have been several suggestions to rationalise these five rates into three, including melding the 12 and 18 per cent slabs into one of 15 per cent. But the states’ fear of a resultant dent in revenues is not without reason. Almost two-thirds of GST revenues come from items in the 18 per cent slab, while a third comes from the 12 per cent slab. There are, however, no estimates of how the revenues would be affected if the 12 and 18 per cent slabs are merged into 15 per cent. The states’ unwillingness to even consider tweaking the rates stems from the fiscal stress they are already under; the withdrawal of the compensation cess also affects them.
According to Finance Minister Nirmala Sitharaman, the average GST rate is at 12.2 per cent at present, much below the suggested revenue-neutral rate of 15.3 per cent. The latter is the rate at which the government would collect the same amount of revenue even after a change in the tax laws.
Sitharaman added that the average of 12.2 per cent underscores the government’s focus on easing the compliance burden more than increasing revenue collections. While her remarks on the need to raise revenues only after simplifying the system and ensuring compliance are noteworthy, the council must also strike a balance between the government’s fiscal constraints and taxpayers’ needs.