Tax board weighs GST slabs rejig, revenue impact

The Central Board of Indirect Taxes & Customs (CBIC) is currently undertaking an exercise to assess the feasibility of the Goods and Services Tax (GST) slab rejig, by merging 12% and 18% rates. Revenue implications of three different scenarios – combining these two rates to a single rate of 14% or 15% or 16%– are being studied, the sources said.

The CBIC’s inputs will likely be used by a recently reconstituted group of ministers (GoM) under the GST Council, which is tasked with reviewing the GST rates structure.

The GST slabs restructuring has been pending for over three years.

In September 2021, a GoM on rate rationalisation led by the then Karnataka chief minister Basavaraj Bommai was tasked to examine the issue. However, it did not make much progress on its mandate except for recommending tax rate adjustments on various items. Now the matter is with the reconstituted GoM headed by Bihar Deputy Chief Minister Samrat Chaudhary.

“The current study is to examine if the rate is reduced on items under 18% slab to 14% or 15% or 16%, what will be revenue loss in each case, and how much revenue gain could be achieved if 12% slab is raised to 14%, 15% or 16%,” an official said.

There are fears that the raising of the 12% slab may face resistance from taxpayers. At the same time, states will likely oppose a move to bring its under 18% bracket to a lower slab.

“There is no problem as such with the current four slabs structure. Wherever clarification is required in tax rates such as those on food items are being addressed by the Council with the assistance of GoM,” another official said, indicating the preference among official circles to largely retain the current slabs.

Currently, there are four major GST slabs – 5%, 12%, 18% and 28%. Officials reckon that 12% contributes around 8% GST revenues while 18% contributes the lion’s share of around 70%.

States including Punjab, Bihar, West Bengal, Karnataka, and Himachal Pradesh have opposed GST slab reduction fearing adverse impact on their finances.

While the GoM on rationalisation rates would take its time to come to any conclusion on slab rejig, many states including Punjab have said in the last GST Council meeting that even on health insurance, the tax rate should be reduced to 5% from 18% not removed completely to protect revenue interest of states while giving some relief to people.

Analysts reckon that GST slab rejig might not be the priority of the GST Council going by the sentiments among states.

“The changes in rate slabs would also impact GST collections which have been on a stable upward trajectory over the past year, simulations on the same in various situations need to be carried out, to prevent any inadvertent slippages in the GST collection targets,“ said MS Mani, Partner, Deloitte India.

Considering the revenue implications, merging the 12% and 18% GST slabs is a complex task, said Tanushree Roy, Director- Indirect Tax, Nangia Andersen India.

“If the weighted average rate falls further, it could worsen the revenue shortfall,” Roy said.

The weighted average tax rate under the GST had come down to 11.3% in FY23, from 14.4% at the time of its launch as against computed revenue neutral rate of 15.5%. It has now fallen further to below 11%.

To ensure the fiscal feasibility of merger of 12% and 18% slabs, the GoM may consider push some of the high-consumption items from the current 18% slab to the 28% slab, said Sudipta Bhattacharjee, Partner, Khaitan & Co. Also, it may consider to bring some of the items currently in the 5% slab into the new merged slab and consider increasing the 28% slab or introduce a new slab beyond 28% for certain specific ‘sin’ goods, he added.