Explained: Tax rate changes decided by the GST Council

What have been the changes announced by the GST Council?

The GST Council discussed recommendations of four ministerial panels — on rate rationalisation, on movement of gold and precious stones, system reforms, and casinos, horse racing and online gaming.

The report by the Group of Ministers (GoM) on rate rationalisation, headed by Karnataka Chief Minister Basavaraj Bommai, was an interim report covering correction of inverted duty structure and withdrawal of exemptions. The GoM has been given a three-month extension to further work on tax slabs changes and rate rationalisation.

The GoM on casinos, horse racing and lottery had finalised a uniform 28 per cent tax on all three categories, but now has been given more time of 15 days to review its recommendations that will then be taken up in the next GST Council meeting, which is likely to be held in first week of August at Madurai.

Correction of inverted duty structure translates into a rate hike for household items such as LED lamps, printing/drawing ink, power driven pumps, Tetra Pak to 18 per cent from 12 per cent, for solar water heaters, finished leather to 12 per cent from 5 per cent and for cut and polished diamonds to 1.5 per cent from 0.25 per cent. Among services, 18 per cent GST will be levied for issue of cheques. Exemptions will also be withdrawn for pre-packaged and pre-labelled food items such as grains, curd, lassi, paneer, jaggery, wheat flour, puffed rice, buttermilk and meat/fish (except fresh and frozen). Such food items will now be taxed at 5 per cent, at par with branded items. Further, refund of accumulated input tax credit will not be allowed on goods such as edible oil and coal.

Exemptions were also withdrawn for room rents: a 12 per cent GST will now be levied on hotel rooms with rent up to Rs 1,000 a day and a 5 per cent GST will be levied on hospital room rent above Rs 5,000 per day (excluding ICU).  GST rate has been cut for ostomy/ orthopaedic appliances from 12 per cent to 5 per cent and transport of goods and passengers by ropeways from 18 per cent to 5 per cent (with input tax credit).

The GoM on system reforms has suggested extra measures for physical verification at the time of registration for high-risk taxpayers including biometric authentication, geo-tagging, use of electricity data and real-time monitoring of bank accounts. Mandatory generation of e-way bills by states for intra-state transportation of gold and precious stones with minimum threshold of Rs 2 lakh was also approved.

These compliance measures and rate changes are expected to yield Rs 15,000 crore revenue in a year, officials said.

Why have the rate changes been undertaken?

Since the introduction of GST in July 2017, several rate revisions have been undertaken affecting the revenue stream which got worsened by the pandemic. Rate rationalisation measures also assume significance given that the guaranteed compensation mechanism to states for five years for revenue losses arising due to GST implementation ended in June and the Council did not take any decision to extend it despite at least a dozen states asking for its extension. Despite an uptick in GST revenues, as per experts, states with a heavy dependence on compensation may find FY23 to be a challenging year.

There were also concerns regarding disputes and revenue leakage which led to withdrawal of exemptions of pre-packaged items. Some companies were seen to be misusing the provision of exempting unlabelled food items by not registering them. For instance, it is learnt there were concerns that a branded rice manufacturer was selling items with a similarly-sounding label but had not registered it as a brand and hence, was selling it under exempted category.

Last year, taking note of the revenue trend dipping below the revenue neutral rate levels, the GST Council decided to look at a series of measures including rate rationalisations to correct the inverted duty structure and the overhauling of the rate structure going ahead augment revenues. The move came after four years of the GST rollout, with the acknowledgement that a series of rate cuts across these years spanning over 500 items had resulted in a strain on finances of both central and state governments with lower-than-expected revenue buoyancy. The GST Council within one year of the July 2017 rollout had reduced rates. The rate cuts on over 350 items out of total 1,211 items in the five broad categories of zero, 5 per cent, 12 per cent, 18 per cent and 28 per cent under GST were estimated to have resulted in a revenue loss of about Rs 70,000 crore in a year.

An inverted duty structure arises when the taxes on output or final product are lower than the taxes on inputs, creating an inverse accumulation of input tax credit which in most cases has to be refunded. For sectors such as mobiles and footwear, inverted duty structure resulted in refunds amounting to Rs 5,500 crore and Rs 2,000 crore, respectively.

Inverted duty structure was corrected for mobiles (March 2020) and footwear (September 2021). It was also decided to correct it for textiles in September 2021 but was later withdrawn in a specially-called one-agenda meeting in December 2021. The GoM on rate rationalisation was then given the additional task of looking into inversion in textiles along with other sectors including utensils, tableware, tractors, pharma, aggarbatti, certain agricultural machinery etc.

What has been the drop in Revenue Neutral Rate and what is the revenue position?

The Committee headed by the then Chief Economic Advisor Arvind Subramanian was of the view that the range of Revenue Neutral Rate should be between 15-15.5 per cent (Centre and states combined). This was in the backdrop of a two-rate structure, a standard rate close to RNR at which maximum tax base would be taxed; and a higher, demerit or sin rate. A September 2019 report by the Reserve Bank of India (RBI) had noted that the rationalisation of rates by the GST Council has brought down the effective weighted average GST rate from 14.4 per cent at the time of inception to 11.6 per cent.

As per the latest revenue figures shared in the Council, the all-India average shortfall between the protected revenue and the post settlement gross SGST revenue was 27.2 per cent in 2021-22 as against 37.9 per cent in 2020-21. In 2021-22, only five out of 31 states/ UTs — Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim — registered a revenue growth higher than the protected revenue rate for states under GST. Puducherry, Punjab, Uttarakhand, Himachal Pradesh, and Chhattisgarh have recorded the highest revenue gap between the protected revenue and post-settlement gross state GST revenue in 2021-22.

What will be the impact on consumers?

Rate hikes for daily-use items such as LED lamps and packaged food items such as wheat flour, paneer, curd, lassi are expected to result in price hikes by companies and are expected to add to inflationary concerns. A tax rate of 12 per cent for hotels below the tariff of Rs 1,000/day is expected to affect the tourism segment in non-metro cities, state government officials said. The overall retail inflation rate based on Consumer Price Index, however, is unlikely to get affected sharply as the weightage of these items is low in the index.

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“This is unlikely to have a significant impact on inflation. Some of these items such as spoons, knives are not bought regularly and some of these items have a very small weight in CPI unlike items such as petrol/diesel which have a higher weight in the index. Hotels for lodging have a weight of 0.00904 in CPI, even if we assume all hotels are below Rs 1,000/day tariff, 12 per cent increase in GST will result in 0.11 basis point increase. If we assume all electric bulbs/tube lights are LED, then it will be a 0.97 basis point increase in CPI. Curd may see an increase of 0.47 basis points. So, it is unlikely to push CPI inflation significantly,” Devendra Kumar Pant, Chief Economist, India Ratings said.