According to the Finance Ministry, a three-rate GST structure to be implemented

According to a National Institute of Public Finance and Policy (NIPFP) analysis, the government may rationalise the GST rate structure without losing revenue by replacing the four major rates of 5%, 12 percent, 18 percent, and 28 percent with a three-rate framework of 8%, 15%, and 30%.

The findings of the NIPFP, an independent think tank backed by the Finance Ministry, are significant because the GST Council has tasked a Group of Ministers, led by Karnataka Chief Minister Basavaraj S. Bommai, to propose a tax rate rationalisation and possible merger of different tax slabs by December in order to boost revenues.

Finance Minister Nirmala Sitharaman noted out at the previous Council meeting in September that multiple rate revisions since the implementation of the GST system in July 2017 have lowered the effective GST rate down to 11.6 percent from the original revenue neutral rate of 15.5 percent.

“Merging the GST rates of 12% and 18% into any tax rate lower than 18% may result in revenue loss.” According to NIPFP associate professor Sacchidananda Mukherjee, “the GST Council may contemplate a three-rate structure by adopting 8%, 15%, and 30% for revenue neutrality,” according to The Hindu.

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Because the nature of rate changes has resulted in almost 40% of taxable turnover value falling into the 18% tax slab, any effort to dovetail that bracket with a lower rate will result in tax losses that must be compensated by marginal increases in the remaining major rates — 5% and 28% —

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Tobacco items, vehicles, and aerated drinks are all subject to a 28 percent rate, plus an additional GST compensation cess.

If the revenue loss from merging the 12 percent and 18 percent slabs could be compensated by simply raising the rate on demerit or sin items, the maximum GST rate would have to be about 38 percent. Alternatively, the lowest standard rate would need to be increased from 5% to around 9%.

‘Revenue leakages’ 

The GST system now has eight separate rates, including zero for basic items and special charges of 0.25 percent on diamonds, precious stones, and 3% on gems and jewellery. After noting that hiking rates on ‘high-value low volume products’ such precious stones and jewelry’may encourage unaccounted (undisclosed) transactions and so tax leakages,’ the NIPFP report assumes these rates remain fixed.

Mr. Mukherjee believes that restructuring GST rates is a good concept for increasing collections, and that it is critical to time the transition to the new rate structure to minimise costs associated with tax compliance, administration, and economic inefficiencies.

According to the NIPFP report, Revenue Implications of GST Rates Restructuring in India: An Analysis, if the GST rate structure that existed at the time of its inception in July 2017 was restored last year, additional GST revenues of over 1.25 lakh crore may have accrued in 2020-21.

‘Important methodology’

“The results are indicative due to data restrictions,” Mr. Mukherjee said, “but the approach adopted in this article could be valuable for any future analysis of GST rate structure rearrangement.”

“The GST Council may consider making certain aggregate data available to the public to aid policy study,” he said, noting that “binding data limits prevent effective research of the GST regime.”