The constraints which any regulatory agency has in fixing the goods and services tax (GST) rates in a country include the fact that it should be low enough to ensure compliance as well as not cause inflation, and high enough to generate revenue for the government. The concerns which led the GST Council to initially prescribe multiple rates was primarily to generate the same revenue as before, and in that light, keep the effective indirect tax rate on the commodity as close as in the previous jurisdiction. Rate rationalizations over a period of time have tried to bring down the rates in sectors to boost economic activity and move from a high rate of 28% to 18% for most commodities.
GST tax structure should move towards lower rate brackets
In the most recent rate rationalization, the highest tax bracket of 28% has been rationalized further with rates on daily-use items like perfumes, cosmetics, toiletries, hair dryers, shavers, mixer grinder, vacuum cleaners and lithium-ion batteries, being lowered to 18%. For a number of consumer durables like refrigerator, washing machine, small screen TV, storage water heaters, paints and varnish, the rate has been reduced from 28% to 18%. Then some products like sanitary napkins have been exempted completely while for others like handmade carpets, the rate has been reduced to 5%.
The impact of reduction of tax rates would be to reduce the price of these commodities. Since most of these are consumer items, this will impact household budgets in a positive way. However, where there is a complete exemption, those goods will not be able to enjoy the credit of input goods and services, which will become a cost and hence, the reduction in prices may not be commensurate with the percentage reduction in GST rates.
The impact of this rate rationalization would be multi-fold. There will be a revenue loss to centre and states because of these rationalizations. The total reduction would be roughly 35% (10% of 28%) of the GST collected on these items. However, given that these cuts would need to be passed on to the customer, due to anti-profiteering provisions, the demand and hence the sale of those commodities would increase, following a simple demand-supply curve. Individual commodities may have varying elasticities and the quantum might vary, yet, overall sales of these items would increase. This will give a boost to economic activity in the country leading to increase in GST and income tax revenue from other sources. For example, a factory starts manufacturing more products, it may need more contract labour, more supply for canteen services, may be hire more vehicles to ferry and hence, more GST on these supplies. Similarly, paints are a major component of the capital expenditure by government and by corporates and individuals.
A number of items still remain within the 28% bracket, including air conditioners, certain vehicles, engines, etc. The rate structure in the next few years should move towards lower rate brackets, minimum exemptions and if any industry needs to be really benefitted in respect of a particular sector, then instead of exemption, either the goods need to be zero-rated or a minimum rate should be levied to recover the credits accruing in the cost.