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Caught between the conflicting objectives of boosting revenue receipts and controlling a runaway inflation, the Centre may make a pitch for calibrated hikes in the goods and services tax (GST) rates over the next couple of years, rather than a one-time trimming of the slabs from four at present to three, according to a senior official.

This view will be conveyed to states, which are concerned about a possible drop in their tax revenues after June, when a five-year revenue cover for them will cease to exist. The Cenre’s road map for GST rate hikes will factor in the need to take the weighted average GST rate from a little over 11% at present to the estimated revenue neurtal rate of 15-15.5% over a two-three year period, but won’t give a shock to the consumers by way of sharp increase in rates.

Rate hikes on mass consumption and essential items will be more gradual, the source added.

Currently, there are four main GST slabs: 5%, 12%, 18% and 28%. About 70% of the GST revenues come from over 480 items which attract 18% GST.

The Centre’s resolve is to shift items under the 12% and 18% slabs to a new median slab of 15%. The 5% rate will be replaced by a new rate which will be 6% or 7%, but the rate tweaking will be done in manner that not more than four slabs are created at any point of time. Finally, in the three-slab structure, the lowest rate will be 6-7%, the median rate will be 15% while the highest slab of 28% will remain unchanged.

Meanwhile, suggestions by a group of ministers (GoM) led by Karnataka chief minister Basavaraj Bommai on GST rate rationalisation will likely be ready by April end. The GST Council may consider these proposals in the third week of May.

“The 12% and 18% rates will collapse into one rate, say 15% or 16%. There will be a lower rate and a higher rate (28%) besides the median rate,” another official said.

Raising the 5% GST rate, which includes sensitive products such as food and medicines, needs to be done gradually, he added. Similarly, if 18% is dropped suddenly to 15%, there will be a big revenue loss.

“One way to do this is to increase 12% slightly in the first phase and simultaneously reduce 18% before coming to the new median rate over two-three years,” the first official said.

Currently, there is too much gap among the rates which creates arbitrage and disputes, the sources said. The ministerial panel will also examine whether there is a scope to shift some items from 18% to the 28% slab.

Kerala finance minister KN Balagopal, a member of the GoM, told FE recently: “We have identified 25 items, including refrigerators, where benefits of GST rate reductions have not been passed on to consumers by the companies. These rate cuts could now be reversed.”

In December 2018, the GST Council slashed the tax rates on a large number of items, including consumer durables, electronic goods and furniture items, from 28% to 18%. These include some televisions, water coolers, ice cream freezers, milk coolers, food grinders, paints, digital cameras, video camera recorders and video game consoles and sports requisites. In November 2017, the rates on chocolates and other food preparations containing cocoa were reduced from 28% to 18%.

While the Council made some attempts to correct inverted duty structures across several value chains, the decision to roll back a uniform GST rate for textiles proved that it won’t be an easy option. The Council had to drop a plan to hike the GST rates for most textile products in the man-made fibre value chain from 5% to 12% in late December 2021 amid protests from the industry from Gujarat and other states. It may revisit the issue.

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Author: Howard Caldwell