TOWARDS LESSER GST RATE SLABS

[Dr. Sanjiv Agarwal]

Time and again, there is a demand being raised by GST stakeholders from various quarters on the number of GST rate slabs in India. Under a now 14 months old GST regime in India w.e.f. 1^st July, 2017,  Goods and Services Tax (GST) is levied and collected under four broad tax rates, viz, 5%, 12%, 18% and 28%. However, there is a upper ceiling of 40% GST rate under the law upto which GST would be levied.

Presently only a handful of nations have 3 or more rates. There are only 5 countries where four or more tax rates are in force. About 50 countries have just one tax rate while about 30 countries have two tax rates.

Apart from these specific tax rates in India, we have zero rated supplies, exempt supplies and supplies with nil rate of GST. In certain cases, there are special rates as in case of textiles, footwear, jewellery etc. To top up the revenue and balance the tax rates, a Compensation Cess is also levied on various specified goods.

Given the socio-economic pattern of Indian society and the economy, the question is can we live with one GST rate which is applicable to all types of goods and services, as it is in many countries successfully levied or is it desirable to have multiple rates of tax, as are presently in force ? Should we have two slabs instead of four ? Can the slabs of 12% and 18% be converged into one rate of about 15% or 16% ? Discussions keep on taking place but with no conclusive end to it.

India is a nation and economy with many heterogamous segments in society and economy in terms of consumption, ability to pay, economic contribution, business domination, protection to domestic industry and so on. While it largely convincing that we may have multiple rates of tax, some convergence may look like a balancing act and shall surely bring in harmony in tax collection and revenue neutrality too. Inflation is also an issue which is linked to GST rates.

While India is projected to have annual growth rate of 7-8 percent in next few years which is considered to be a fastest in last few years, rationalization of GST rates could benefit industry as well as tax administration, besides reducing possible litigation on rates and classification disputes. The IMF report has fore cast the GDP growth. @ 7.3 percent for financial year 2018-19 and @ 7.5% for financial year 2019-20 taking into account investment and strong private consumption. It states that India is recovering from the after effects of demonetization in November, 2016 and implementation issues in GST. India is also benefiting from good macro and stable economic policies backed by other socio economic reforms in recent past.

International Monetary Fund (IMF) has recently in its annual report expressed that India is on a track to be one of the fastest growing economy in the world and that further rationalization of GST inter alia, would give maximum benefits including labour reforms for companies to expand. It acknowledges GST as one of the biggest economic reform but advocates for a simplified GST and only two rates to facilitate compliances and check administrative overheads. A standard lower rate could be made applicable to most of the items whereas a higher rate levied on few select supplies so much so that it balances the revenue collection to be revenue neutral and achieves the target revenue growth, i.e. is progressive. However, it also flags certain areas of concern such as high oil prices, threatening of global financial condition, shortfall in tax revenue etc.

According to IMF report, GST has been a ‘mile stone reform’ in India’s tax policy and an important step of unifying and harmonizing many indirect taxes across all states and Union Government but has cautioned that multiple tax structure and other features could give rise to cost of collection and administration and higher compliances. GST has a complex structure with relatively high number of rates / exemptions which could be simplified without sacrificing progressively of the current GST and with potentially significant gains from lower compliance and administrative costs. Streamlining of exemption would also contribute to progressive tax regime. GST is also expected to increase the amount of economic activity taking place in the formal sector of the economy.

Though GST Council, the apex decision making body for GST is seized of the matter and is authorised to make recommendations in this behalf, following form of rationalization may be looked at:

Present Rate	Proposed Rate
Zero / Nil	Zero / Nil
5%	6%
12%	15%
18%
28%	25%

This may later be further rationalized with zero percent and 25% percent still being on the board. As the countrymen become used to GST, revenues build up, compliances increase and people respecting reasonable profiteering with seamless input tax credit mechanism, India should look at a median rate of 10 to 12 percent by converging all other rate slabs.

Going forward, this should be the approach which may be debated by tax collectors, tax payers and all stakeholders of GST.

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