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Informist, Tuesday, Dec. 3, 2024

NEW DELHI – The group of ministers on rate rationalisation on Monday proposed to hike the goods and services tax rate of 28% on sin goods such as cigarettes, tobacco and related products, and aerated beverages to 35%, people aware of the development said.

 

In total, the panel - which finalised its report to submit to the GST Council – decided to propose GST rate tweaks on nearly 150 items. "The net revenue impact will be positive," said one of the people cited above. The GST Council will up take the report for discussion at its next meeting on Dec. 21. 

"The GoM has agreed to propose a special rate of 35% on tobacco and related products and aerated beverages. The four-tier tax slab of 5, 12, 18 and 28% will continue and a new rate of 35% is proposed," the source said. Informist had exclusively reported on Jul. 25, citing Revenue Secretary Sanjay Malhotra, that the government might add an additional component to the 28% GST rate on sin goods once the compensation cess levied on demerit goods is discontinued.

To bring states on board to adopt the GST regime in 2017, the Centre had promised to protect 14% revenue growth for states for the first five years by levying a cess on certain luxury and sin items such as tobacco items, motor vehicles, expensive motorcycles, caffeinated beverages, and aerated drinks. Originally, the collection of GST compensation cess was to be discontinued in June 2022.

However, GST collections dwindled during the COVID-19 pandemic and the Centre borrowed an additional INR 2.69 trillion from the market in 2020-21 (Apr-Mar) and FY22, and passed on these funds to states as back-to-back loans to partly meet the shortfall in collections. The loans were to be repaid from GST compensation cess collections. The GST Council extended the compensation cess till March 2026 to pay interest and repay the loans.

At the meeting on Monday, which was chaired by Bihar Deputy Chief Minister Samrat Chaudhary, the rate rationalisation panel also proposed to rationalise GST on apparel. Ready-made garments worth up to INR 1,500 will attract 5% GST, those between INR 1,500 and INR 10,000 will attract 18%, and garments costing above INR 10,000 will attract 28% tax. The GST Council will take a call on this proposal on Dec. 21. 

At its previous meeting on Oct. 19, the panel had already proposed a host of GST tweaks, moving mass consumed items from a higher bracket to a lower bracket, while moving some luxury items to a higher bracket from the current lower GST. The proposed changes aim to raise taxes on luxury and sin goods on the one hand, and provide relief on essential items on the other.

The ministerial panel had decided to propose lowering the 18% GST on packaged water above 20 litres to 5%, 12% GST on bicycles costing less than INR 10,000 to 5%, and 12% GST on exercise notebooks to 5%. This move is aimed at making essential products more affordable, especially for middle-class and lower-income groups, people in the know had said, requesting anonymity. The panel also proposed to increase the GST on wristwatches priced above INR 25,000 to 28% from 18% and on shoes costing over INR 15,000 to 28% from the current 18%.

The rate rationalisation panel has Kerala Finance Minister K.N. Balagopal, Uttar Pradesh Finance Minister Suresh Kumar Khanna, Karnataka Revenue Minister Krishna Byre Gowda, West Bengal Finance Minister Chandrima Bhattacharya, and Rajasthan Medical and Health Services Minister Gajendra Singh as members.

At the next meeting, the council will decide whether there is scope for further rate rationalisation and, based on that, may take a call to retain the ministerial panel so that the rationalisation exercise continues periodically, another person said, requesting anonymity.

These rate rejig proposals come at a time when there is some strain on revenues. On Monday, Finance Minister Nirmala Sitharaman said that the average GST rate in FY24 was 11.64%, much lower than the revenue neutral rate of 15.0-15.5% assumed during the introduction of the GST regime. A committee headed by the then chief economic adviser Arvind Subramanian had suggested a revenue neutral rate of 15.0-15.5%.

The GST Council started a rate rationalisation exercise as part of an attempt to improve revenues, by reassessing tax rates, pruning the exemption list, and correcting inverted duty structures. GST slabs may have to be rationalised to augment additional revenue for states, as several of them have revenue deficits despite being provided grants to eliminate such deficits, PRS Legislative Research said in a report titled 'State Of State Finances' last year.  End

Reported by Priyasmita Dutta
Edited by Avishek Dutta

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