An issue that has been dogging Goods and Services Tax (GST) since its very inception has been the multiplicity of tax rates. There are as many 6 slabs. 0 percent, 0.25 percent for semi-precious stones/diamonds, 3 percent for gold/silver, and 5 percent, 12 percent, 18 percent and 28 percent for the other range of goods and services.

Tax administrators would have ideally wanted just three rates — a standard rate in which the bulk of the goods and services would fall flanked by a merit rate and a demerit rate. That was not to be. Political reality dictated the need for having as many rates as were finally arrived at.

Thus, revenue neutrality was always a challenge. Even this was lost very early on. As the Fifteenth Finance Commission has pointed out, the effective weighted average GST rate at the time of inception was between 14 percent and 14.4 percent as against a much higher pre-GST weighted average rate. As per a study of the RBI, this had come down to 11.6 percent. The IMF had estimated that the current effective tax rate was around 11.8 percent.

Despite this GST seemed to have settled down. Revenue was doing well. The November 2021 gross revenue crossed 1.30 lakh crore for the second month running. At 1.31 lakh crore, it was the second-highest since the introduction of GST. Multiple reasons can be attributed for the spurt in revenue. The economy looking up, policy measures ensuring improved compliance, GSTN stabilising and robust enforcement.

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It was felt that this was the ideal time for moving towards a rationalisation of rates. It was in this background that the 45th GST Council meeting held on September 17, 2021, constituted a group of ministers (GoM) headed by the CM, Karnataka. The task before the GoM was to rationalise the whole range of GST rates. This included reviewing exemptions, inverted duty structure, the tax slabs rates including the merger of tax slab rates. The GoM was tasked to submit its report within two months -in effect by November end.

In the meantime, there was an unconfirmed news report that suggested that the fitment committee of officers had recommended rates to the GoM. The committee is said to have suggested raising the slab of 5 percent to 7 percent and 18 percent to 20 percent. Further, a suggestion to raise the rate on precious metals from 3 percent to 5 percent is also said to have been made.

Prof. S. Mukherjee of the National Institute of Public Finance & Policy has in a mid-November working paper (No.358) suggested a merger of the 12 and 18 percent slabs into 15 percent, increasing the 5 percent slab to 8 percent and 28 percent to 30 percent.

The GoM thus had its hands full. While all this was being discussed, Timsy Jaipuria of CNBC TV18 broke the news two days ago that the Government had requested the GoM to defer its report. The reasons speculated were many-GST revenue stabilising, the possible impact of a hike in rates on inflation and the volatile political situation, a euphemism for the fact that important state elections were around the corner.

As pointed out earlier there is no denying that GST revenue is doing well. Any rationalisation at this juncture would most certainly have an impact-and not necessarily a positive impact.

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Despite revenues having done well, the fact remains that expenditure also has ballooned to offset the pandemic-driven stress. Fiscal deficit during April-October touched Rs.5.5 lakh crore. Overall debt outstanding to GDP for both the Centre and the States has gone up sharply.

The progress on disinvestment has been muted. The target of Rs1.75 crore despite the successful sale of Air India is some distance away.

The NSO data shows that retail inflation based on the consumer price index has increased to a three-month high of 4.91 percent. Worrying still is the fact that food inflation has increased to 1.87 percent from 0.85 percent in October.

Any rationalisation of slabs would necessarily involve goods from the 12 percent slab moving up. And going by the recommendations of the Fitment Committee and NIFPFP, it could also mean the 5 percent slab being moved up to 7-8 percent. There is no doubt that these will have inflationary consequences. And there is still no certainty as to how Omicron will pan out and the impact this will have on the economy. There are too many unknowns.

In yet another scoop, CNBC TV18 has revealed that the Textile Ministry has requested that the rate rationalisation done to correct the inverted duty structure be put on hold. If this is indeed correct, it is strange to say the least. The correction of the inverted duty structure was done at the behest of the industry. So, if even mere rate rationalisation is going to be a challenge, any convergence of rates will take a lot of effort.

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While convergence is desirable, the decision to defer it for the present is wise. It needs to be done — but should be done after an informed public debate. It should be ensured that sufficient lead time is given for both industry and GSTN to prepare themselves. Ideally, there should be certainty in any change of tax slab. Any change going forward could be implemented from the beginning of the fiscal year. Mid-year corrections should be avoided except in cases of emergency like the COVID-related exemptions.

While there can never be a good time to increase rates, this certainly is, for strictly economic reasons, not the time. The GST Council should continue to focus on easing compliance, tightening enforcement and making technology robust.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal