Goods and Services Tax (GST)

Finance Ministry backs three-rate GST structure

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST slab

Mains level : Harmonization of GST

The Government can rationalize the GST rate structure without losing revenues by rejigging the four major rates of 5%, 12%, 18% and 28% with a three-rate framework of 8%, 15% and 30%, as per a National Institute of Public Finance and Policy (NIPFP) study.

GST Slabs

  • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
  • These comprise rates of 5%, 12%, 18%, and 28%. The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
  • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
  • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

Why harmonize GST slabs?

  • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
  • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.
  • The nature of rate changes has also meant that over 40% of taxable turnover value now falls in the 18% tax slab, thus any move to dovetail that slab with a lower rate will trigger losses.

What next?

  • Restructuring GST rates is a timely idea to improve revenues.
  • It is important to sequence the transition to the new rate structure so as to minimize the costs associated with tax compliance, administration, and economic distortions.

 

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