The Goods and Services Tax (GST) Council can consider a three-slab structure—8, 15 and 30%—to achieve revenue neutrality, if it decides to do away with the current structure of tax rates of 5%, 12%, 18% and 28%, a recent study by Delhi-based think-tank National Institute of Public Finance and Policy (NIPFP) suggests.

The recommendation comes at a time when the panel of the state finance ministers, tasked with the responsibility of rationalizing GST rates, is in the final stages of readying its report that must be submitted to the GST Council. The next meeting of the panel is on November 27. NIPFP working paper on ‘the revenue implications of GST rates restructuring in India’, says that mere merger of 12% and 18% tax slabs into any rate lower than 18% (to reduce the number of tax slabs) may result in revenue loss.

“Since 18% tax rate holds a two-fifth share in total taxable value as against 12.3% by 12% tax rate, if the merged tax base attracts 15% tax, there will be revenue loss. To compensate for the revenue loss, if the GST Council considers increasing the highest rate (28% at present), the highest tax rate needs to be increased to approximately 38%. Alternatively, if the Council consider increasing the 5% tax rate, it needs to be increased to approximately 9%. Also, the council may consider three rate structures of GST by adopting 8% 15% and 30% and it may help to achieve revenue neutrality”, Sacchidananda Mukherjee, associate professor NIPFP, points out in his study.

The study concludes that sequencing the transition to the new GST rate structure will be important to minimise the cost associated with tax compliance, tax administration and economic distortions. Consultations of stakeholders would be another important aspect before introducing the new GST rate structure, it says.

The group of state ministers looking into the rationalisation of GST rates is headed by Basavaraj S. Bommai, chief minister of Karnataka. The members are Bihar deputy Chief Minister Tarkishore Prasad and Amit Mitra and K N Balagopal, finance ministers of West Bengal and Kerala respectively.

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