A Group of Ministers (GoM) under Karnataka Chief Minister Basavraj S Bommai’s convenorship, which began thrashing out issues related to GST rate rationalisation on Friday, is expected to recommend raising rates on some goods and services to ensure that the Revenue Neutral Rate (RNR) reaches the level it was at the time of introduction of GST.
Sources said a majority of the members in GoM supported increasing the tax rates.
“The RNR slipped from 16 per cent to 11 per cent after four years of GST implementation. States lost their revenues because of this.
“There is an increasing urgency about streamlining rates which were brought down on some goods and services owing to different political and electoral compulsions. But that shouldn’t simultaneously imply that the burden would be passed on to the consumers,” a highly-placed source in the know of the discussions told BusinessLine.
Streamlining the rates
The GoM is believed to have discussed a study done by Ministry of Finance, Kerala, on the impact of reducing the GST rate on about 25 goods and services.
The study found that the decrease in GST on goods such as batteries, chocolates and vacuum-cleaners did not benefit the consumer.
The Ministry examined the prices of these 25 items just after decreasing the rate and followed it up after a period of six months of the rate decrease.
“On both occasions, the prices of these products increased. Neither the government nor the consumer got any benefit of the decrease in tax rate. The beneficiaries were the companies that produced these goods,” a source said, quoting the study.
The study recommended that the anti-profiteering agencies should examine how the decrease in tax rate helped big companies.
“There are apprehensions that the Centre, to maintain the RNR, is resorting to indirect taxation that would adversely affect the common man. The RNR can be maintained also by increasing Corporate Tax, Income Tax, Wealth Tax and by introducing Inheritance Tax,” a source said.
The RNR needs to be brought to pre-GST rates to prevent revenue loss both to the Centre and the States. As on date, there are multiple rates consisting of four main rates – 5, 12, 18 and 28 per cent – and some special rates such as 0, 0.25, 1 and 3 per cent.
There was a suggestion to merge 12 and 18 per cent and adopt a median rate of 15 per cent. Various other permutations and combinations were being considered for rate rationalisation.
The present GoM is expected to lay out the final blueprint.
Other discussion points
Other terms of reference for the GoM on rate rationalisation include review of the supply of goods and services exempt under GST to expand the tax base, elimination of breaking of ITC (Input Tax Credit) chain and review of instances of inverted duty structure (IDS).
IDS refers to higher duty on inputs and lower duty on outputs, which results in a higher refund to industry, affecting the cash flows of companies and revenue collections of the government.