Changes in GST Rates may be Delayed by a Few Months

High global commodity prices have resulted in a rise in inflationary expectations among households and firms, putting the RBI’s ( Reserve Bank of India ) accommodative policy stance under scrutiny. A much-anticipated restructuring of the GST ( goods and services tax ) slabs to raise the RNR  ( revenue-neutral rate ) from a little over 11 percent now to 15.5 percent could be delayed by a few months.

Because a five-year compensation mechanism for state governments‘ GST income deficit is slated to expire on June 30, a delay in the GST slabs reset might have major ramifications for state governments’ revenues. In order to avoid a financial shock, the Centre may find it more difficult to refuse states’ demands for an extension of the compensation. States’ spending, particularly revenue spending, has soared in the aftermath of the epidemic in recent years, despite severe income restrictions.

“The GST Council will review the recommendations of the GoM ( group of ministers ) on rate rationalisation. “The changes in GST slabs will be done in stages, keeping inflationary pressures in mind,” a senior official told FE, acknowledging the difficulty of raising tax rates now. In the meanwhile, officials are counting on continued growth in GST collections and anti-evasion measures to close the gap in expected GST receipts.

The administration is also aware that increasing indirect tax rates over a large range of products at this time could reduce spending and slow economic growth in the short run.

State governments are guaranteed 14 percent annual revenue increase for the first five years after the tax’s debut in July 2017 under the GST compensation mechanism, which is legally guaranteed.

GoM ( The group of ministers ) chaired by Karnataka chief minister Basavaraj Bommai was unable to reach an agreement on how to revise the GST rates, causing the report to be delayed. In September 2021, the panel was formed.

Given that stakeholder consultations on the GoM report would take time, and that several crucial state elections, including as those in Gujarat and Himachal Pradesh, are scheduled for 2022, a thorough GST rate rejig may be postponed for longer.

While the council attempted to fix inverted duty structures across numerous value chains, the decision to revert to an unified GST rate for textiles demonstrated that it will not be an easy task.

Due to concerns from the textile sector in Gujarat and other states, the council had to abandon a plan to raise the GST rates for most textile items in the man-made fibre value chain from 5% to 12% in late December 2021. It is possible that the topic will be revisited soon.

With commodity prices hardening as a result of the Ukraine-Russia crisis, India’s WPI ( wholesale price inflation ) reversed course in February 2022, rising to 13.11 percent from 12.96 percent in January. In February, retail inflation (CPI) increased little to 6.07 percent from 6.01 percent the previous month, hanging just above the upper bound of the RBI’s target range of 2 percent to 6%.

“Before concluding on the rate rationalisation process, it is critical to thoroughly analyse all variables, including the likelihood of inflation.” According to MS Mani, partner at Deloitte India, “it is also vital to ascertain the perspectives of major industry stakeholders.

GST was expected to generate significant additional economic growth and increase revenue productivity. However, partly due to the epidemic, earnings from this comprehensive destination-based consumption tax have continually fallen short of the government’s projections. Revenues have risen in recent months as a result of the government’s war on tax evasion and the formalisation of the economy.

Officials hope that average monthly GST collections will increase to around Rs 1.35 lakh crore in FY23 from Rs 1.23 lakh crore in FY22, resulting in an additional Rs 90,000 crore in state GST collections in the next fiscal year.

Another official stated that there have been conversations of merging the 5% and 12% GST rate categories into a single rate of 7% or 8%. However, boosting GST rates at this time may be difficult for goods such as food, which are subject to a 5% tax.

If the GST Council has to replace the existing structure of four rates — 5%, 12%, 18%, and 28 percent — with a three-slab system, an analyst pointed out that the peak rate of 28 percent, which covers a few luxury items, is unlikely to be altered. Another alternative is to combine the rates of 5% and 12% to make a rate of 7% to 8%, or to combine the slabs of 12% and 18% to get a rate of 15-16%. Again, the 18 percent may not be modified because it accounts for 70% of GST revenue. It’s also likely that some things will be shifted from the current 5 percent or 12 percent slab to the 18 percent slab. A few goods in the 5% category might also be exempt.

While the GST compensation system is set to expire on June 30 this year, finance minister Nirmala Sitharaman told Parliament earlier this week that several states have asked for it to be extended. The Centre has emphasised, however, that the statutory need was to compensate states for GST shortfalls only for the first five years following the implementation of the GST.

It further stated that the cesses will need to stay in place till the end of FY26 only to service the debt obtained to reimburse the states for 2020-21 and 2021-22. To make up for the gap, the Centre released Rs 1.1 lakh crore for 2020-21 and Rs 1.59 lakh crore for 2021-22 as back-to-back loans, after a GST Council resolution. The money were raised through a special window established by the Reserve Bank of India.