The planned GST reforms, including a two-slab tax regime and lower rates on consumer items, are likely to translate into an average annual loss of Rs 85,000 crore in revenues but could propel consumption growth of Rs 1.98 lakh crore, a Report by SBI Research published on Tuesday stated.
According to the Centre's plan for a 'next-gen GST,' the Goods and Services Tax would have a two-rate system of 5% and 18%, based on whether products are tagged as 'merit' or 'standard.' On top of that, there would be a 40% tax on a small set of 5–7 goods, including demerit ones such as pan masala and tobacco.
SBI Research noted that the effective weighted average GST rate has fallen from 14.4% at inception to 11.6% in September 2019. With the proposed rationalisation, the average rate could further decline to 9.5%.
While there may be the risk of revenue loss, the stimulus to consumption, which could increase GDP by 0.6%, is not likely to drive inflation as taxes on mass consumption goods would reduce under the new GST regime. The report indicates that aggregate CPI inflation may ease by 20–25 basis points.
For the commodity goods like food and apparel, where the rate of GST is to decline from 12% to 5%, CPI inflation could decline by 10–15 basis points, under the assumption of a 60% pass-through impact on food. Rationalizing service GST rates will further decrease CPI inflation by 5–10 basis points for other services and goods, with a 25% pass-through impact assumed.
"The GST 2.0 regime, involving also an average revenue loss of Rs 85,000 crore, is estimated to have increased consumption by Rs 1.98 lakh crore," SBI Research pointed out. Revenue loss for the ongoing fiscal is seen at Rs 45,000 crore on the presumption that the new rates start from October to March.
That, when added to the income tax rate reductions proposed in the Budget, would amount to Rs 5.31 lakh crore of overall impact on consumption spending, or about 1.6% of GDP, the report says.
The Centre's plan will be discussed by a panel of state finance ministers on Wednesday and Thursday and then put before the GST Council in its next meeting.
The present GST framework (GST 1.0) has four principal slabs of 5%, 12%, 18%, and 28% which apply to most items and services. There are also three special rates: 3% for gold, silver, diamonds, and jewellery; 1.5% for cut and polished diamonds; and 0.25% for rough diamonds.
Besides, there is a GST Compensation Cess imposed on chosen items such as tobacco, aerated water, and motor vehicles at different rates to pay back the states for possible losses of revenue during the transition to GST.
As part of rate rationalisation (GST 2.0) in the 79th Independence Day address on 15th August, these new-gen GST reforms were proclaimed by Prime Minister Narendra Modi, with a pledge that the reforms would be announced by Diwali.
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