The GST needs a major overhaul in its rate structure—a tough political call that the government needs to take sooner rather than later. This despite the tremendous improvement in GST collections witnessed since the last financial year. The need to overhaul the GST rate structure stems from the fact that the revenue neutral rate as calculated by the 15th Finance Commission was supposed to be 15.6% but the actual average rate is 11.8%. The Finance Commission has also noted that GST has the potential to generate revenue at 7.1% of GDP, but is actually generating only around 5% of GDP. This necessarily means that the states and the Central government are losing around Rs 4 lakh crore of revenue at the current level of GDP.
This ‘leakage’ of revenue needs to be fixed, and so the Central government and the GST Council have gone into a huddle to discuss the issue, again. A Group of Ministers (GoM) under the aegis of the GST Council is deliberating on a major rate revision. Assisting the GoM is the Fitment Committee of the GST Council. Apart from increasing the GST rates on many goods and services, the GoM would also be deliberating on changes in the current GST slab—5%, 12%, 18% and 28%. And as the information is getting filtered out, some media reports have suggested that the Fitment Committee has proposed increasing some of the slab rates by 200 basis points—for example the 5% slab should be hiked to 7% and the 18% slab to 20%.
Another report suggests that the National Institute of Public Finance and Policy (NIPFP) has proposed a three-slab structure—8%, 15% and 30%—instead of the existing four. Also, the NIPFP, in a report, has said that the merger of 12% and 18% slabs to any slab lower than 18% would lead to revenue loss. Going by the tone and tenor of the current discussions and reports coming out in the media, it is clear that indirect taxes on goods and services would go up significantly, and it is no longer a question of if but when. The decision to increase the GST rates would come at a political cost, mostly to the party that has a government at the Centre. It is to be seen how soon the government is ready to bite the bullet.