In an attempt to raise revenues, States seek a hike in goods and services tax (GST) rates to bring the current average GST rate closer to a revenue neutral rate. Sources say there is a push to move many items from the five percent bracket to a bracket above eight percent.
According to highly placed sources, GST Council on November 27 had asked states to come back with specific suggestions for revenue augmentation and many state officers and stakeholders have pitched for rate rationalization saying that the government can consider bringing down the 4-slab structure of GST to 3 rates, by hiking the 5 percent slab to 8 percent or above and merging the 12 percent with 18 percent slab and keeping the 28 percent slab as is.
Discussing this development in detail Soumya Kanti Ghosh, group chief economic adviser, State Bank of India (SBI) said, “There are three factors that go into it. One is that revenue neutral rate could be lower than it was earlier anticipated. Two, there is an element of economic slowdown and three there is possibility of non-compliance. So it is not clear whether the revenue neutral rates goes up or it is the factor of economic slowdown or it is the factor of non-compliance. Until and unless we are able to understand whether each of these three factors outweigh each other, it is difficult to say whether it will lead to an increase in revenue,” said Ghosh in an interview with CNBC-TV18.
Meanwhile, opposing the suggestion of hiking lower slab TM Thomas Isaac, Finance Minister of Kerala said, “The GST council after a very prolonged deliberations fixed the rates and slabs but the upper slab of 28 percent without much serious consideration of revenue implication was brought down. Now they want to raise the rates of lower slab, which is not fair. In this current situation, it is not right to impose higher burden on people. Therefore, I would say raise the higher slab,” Isaac said.
When asked what he was expecting to happen on December 18, Isaac told CNBC-TV18, “I think central government is contemplating or suggesting raise in the rates. I am opposed to raising the rates in the lower slab.”
When asked who was making the suggestion of raising the lowest rate from 5 to 8 or 10 percent, Isaac said nobody has made the suggestion, it is all in the newspapers. So he did not know who was making them. “I think the central government is contemplating this because no states have said to raise the rates," he said.
Isaac further added that there has been no formal communication from the Centre to the states, apart from reports in newspapers. "I am opposed to raising the rates in the lower slab. My suggestion is very clear. Keep the lower slab as it is and raise the upper slab,” Isaac further mentioned.
According to Ghosh, there are few things which may come through if there are rate increases. "One is it could negate any of the direct tax policy impact which could come later. The second is the impact on inflation, which could have an impact on the monetary policy. Third, any indirect tax proposals take time to permeate through the system, it is not as immediate as direct tax measures." Finally, he added any adjustments in the tax rate will have an impact on the private consumption expenditure, which at this point of time is a very important ingredient of any economic recovery that could come through at a later date.
“At this point of time we have to live with the new normal of higher fiscal deficit and lower growth. So to that extent if the message of growth comes from the government, that will be better for the market,” Ghosh further mentioned.