FM: GST council to discuss rate rationalization on Sept 9, final decision later

• The upcoming Goods and Services Tax (GST) Council meeting on September 9 will discuss rationalisation of rates on several items.

Highlights:

• The upcoming Goods and Services Tax (GST) Council meeting, scheduled for September 9, will address the rationalisation of GST rates on various items.
• However, Finance Minister Nirmala Sitharaman has indicated that no decisions on rate changes will be made during this meeting.
• Instead, a committee of officers will present the current GST rate status, which will then be reviewed by the Group of Ministers (GoM) on rate rationalisation.

Detailed Examination of GST Rates:

• The primary agenda for the September 9 meeting includes a comprehensive presentation by a committee of officers on the existing GST rates.
• This presentation will provide a detailed comparison of current rates with the revenue neutral rate, a critical metric used to ensure that tax adjustments do not lead to a loss of revenue for states or the Centre.

Revenue Neutrality Concerns:

• Maintaining revenue neutrality remains a central concern in discussions about GST rate changes. A study by the Reserve Bank of India (RBI) indicated that while the revenue neutral rate was pegged at 15.3 per cent in earlier reports, the weighted average GST rate had dropped significantly over the years—from 14.4 per cent in May 2017 to 11.6 per cent by September 2019, and reportedly even lower currently.

GST Tax Slabs and Potential Changes:

• The GST system currently features five tax slabs: zero percent, 5 percent, 12 per cent, 18 per cent, and 28 per cent, with an additional compensation cess of 1 per cent to 290 per cent on luxury and demerit goods. Discussions have previously explored the possibility of merging the 5 per cent and 12 per cent slabs or the 12 per cent and 18 per cent slabs.
• However, no formal decisions have been made on these proposals.

Compensation Cess Levy:

• Another topic on the agenda is the compensation cess levy, which is slated to continue until March 2026 to cover loans taken to compensate states for revenue shortfalls under the GST regime.
• The GST Council may discuss the future of the compensation cess levy in the upcoming meeting or in subsequent discussions.

Recent Developments and GoM Review:

• Last week, the reconstituted GoM on rate rationalisation, led by Bihar’s Deputy Chief Minister Samrat Chaudhary, met for the first time.
• The GoM broadly agreed not to alter the existing GST slabs but acknowledged the need for further review.
• The committee is particularly focused on evaluating the GST rate for health and life insurance premiums, with further data collection underway.

Prelims Takeaways:

• GST Slabs