GST Rationalisation: Challenge And Response

Context: With the GST revenue settling down, the creation of the group of ministers (GoM) by the GST Council for rate rationalisation and correcting the inverted duty structure is both timely and appropriate.

Economic challenges before GST rationalisation council

• Challenges in rate rationalisation: The average incidence of duties shall be raised from current level of 11.8% to about 14% (revenue neutral rate) as suggested by the Fifteenth Finance Commission.
  • But this has to be achieved ensuring that whole process is non-inflationary while also giving a boost to labour-intensive manufacturing.
• Import regime has become too protective in the last few years. The average import tariff rates have gone up from 10 per cent to 18 per cent.
• Continuing exemptions: Petroleum products, electricity and real estate still out of GST.

Way forward

• Standard GST rate must be brought down from 18% to 16%: To keep whole process non-inflationary.
  • This will benefit services sector, which now bears primary responsibility of creating employment.
• Extremities of GST rate spectrum have to go up: Which is in line with recommendations of Committee on Dual Control, Threshold and Exemptions, that only state VAT exemptions prevalent in pre-GST era be retained while phasing out many of the erstwhile central excise exemptions.
  • Revamp merit rate: Exempted items will have to move to merit rate. There is a case for increasing the merit rate from 5% to 8%.
• Boosting employment generation: A large number of labour-intensive manufacturing sectors like textile and footwear that fall under the 12% GST slab can move down to 8%.
  • It will also fix the inverted duty problem for both the segments.
• Peak rate of 28 per cent-plus cesses must move to 30 per cent-plus cesses: To cushion the impact of this increase, two-wheelers could be brought under 16 per cent rate slab.
• Two sectors will have to be tapped in order to raise the revenue weighted average GST incidence.
  • Revisiting of GST rate on gold, which is now at the special rate of 3%, shall be raised to 5%.
  • In case of tobacco, present GST rate is 5% for unprocessed tobacco levied under GST reverse charge mechanism. This GST rate could move towards the general tobacco rate of 28%.
• Expanding GST ambit: Bringing petroleum products under GST could be considered when international oil prices soften in the future. Electricity and real estate shall also be brought under GST.

Conclusion: If the GST rate rationalisation exercise is cleverly crafted along with concomitant changes in the import tariff regime, it can spark off a revival of manufacturing especially in the labour-intensive segments.