The Fifteenth Finance Commission (FFC) has suggested the Goods and Services Tax (GST) Council simplify tax rates by creating just three slabs. A standard rate of 17% has been suggested, a lower merit rate for items of common consumption and a higher rate on luxury and sin goods. Currently there are four rates - 5%, 12%, 18%, and 28%.
Union finance minister Nirmala Sitharaman put forth a similar view. “Eventually, we will of course have to rationalise [the rates]. Do we want so many slabs? Do we want to have just two or three slabs? Original intent was that we have just the three — merit, sin, and the standard; just the three rates,” she said.
The GST Council and the Finance Commission are essentially complementary. Both are constitutional entities, and are independent in their domains, and function in the national interest. Rationalisation of tax rates, the timing, and sequence are the GST Council’s prerogative. Falling revenue collection is one of the key concerns of the Council, which was part of its agenda for discussion at its 38th meeting on Wednesday. The apex decision-making body on the indirect tax, however, deferred deliberation to its next meeting pending comprehensive data and analysis on this matter. The Council, chaired by the Union finance minister along with finance ministers of states and Union Territories as its members, usually meets every two months.
As GST is a tax on consumption, the economic slowdown affected revenue collections for three consecutive months – August, September, and October. In these months, the revenue collection was below the Rs 1 lakh crore benchmark. India’s gross domestic product (GDP) grew at 4.5% in the July-September quarter (Q2 2019-20), the lowest since March 2013. Revenue collection, however, picked up in November and touched Rs 1,03,492 crore due to the government-induced stimulus and a spur in demand during the festive season.
Speaking at the 37th GST Council meeting in September, the FFC chairman said there had been GST rate cuts since its inception in July 2017, and rarely there had been any increase, which upset the time frame for the tax regime to become revenue-neutral. This resulted in a cluttered rate structure and posed enormous challenges over the compliance and challenges of technology. Therefore, time has come to go back to the drawing board and rationalise tax rates.