According to a report, the GST Council could raise the lowest tax slab from 5% to 8% at its next meeting. A panel of state finance ministers is expected to submit a report to the Council by the end of the month, recommending a variety of revenue-raising measures, including raising the lowest slab and rationalising the slab.
GST is currently a four-tiered structure with tax rates of 5%, 12%, 18%, and 28%, respectively. Essential items are exempt or taxed at the lowest rate, while luxury and depreciation items are taxed at the highest rate. On top of the highest 28 percent slab, luxury and sin goods attract cess. The GST cess is used to compensate states for revenue losses caused by the implementation of the GST.
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According to the report, raising the tax slab from 5% to 8% could generate an additional 1.50 lakh crore in annual revenue. Making the calculations, a 1% increase in the lowest slab, which primarily includes packaged food items, results in an annual GST revenue increase of 50,000 crore.
The Group of Ministers also wants to make GST a three-tier system, with rates of 8%, 18%, and 28%, respectively. If the proposal is approved, all goods and services that are currently taxed at a rate of 12% will be taxed at an 18% rate. In addition, the ministers want to add more items to the various tax slabs and remove items that are currently exempt from GST. Unpackaged and unbranded food and dairy products are currently GST-free.
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With the GST compensation regime set to expire in June, states must become self-sufficient and no longer rely on the federal government to close the revenue gap in GST collection.
The Centre agreed to compensate states for 5 years, until June 2022, and to protect their revenue at a rate of 14% per year over the base year revenue of 2015-16 when the GST was implemented on July 1, 2017. However, due to a reduction in GST on a number of items, the revenue-neutral rate has fallen from 15.3 percent to 11.6 percent over the last five years.
“As the revenue neutral rate has come down and the states stare at a shortfall of about ₹1 lakh crore, efforts have to be made to make GST revenue neutral and the only way to do it, is rationalise the tax slab and check evasion,” a source said.
Over the years, the GST Council has frequently crumbled in to the demands of business and industry, lowering tax rates. For example, the number of goods attracting the highest 28% tax came down from 228 to less than 35.
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