GST Council meet on rate reform begins; Opposition states seek compensation

The GST Council, at its 56th meeting on Wednesday (September 3), started deliberations on “next-gen GST” reforms, which will lower tax rates on items of mass consumption, remove duty inversion in sectors such as textiles, and ease compliance burden for MSMEs.

The meeting was chaired by Finance Minister Nirmala Sitharaman and comprised state ministers.

GST rejig plan

The Council, over the next two days, will discuss reducing the number of GST slabs to just two — 5 per cent and 18 per cent — and removing the 12 per cent and 28 per cent slabs. Also, a special 40 per cent tax has been proposed on a select few items, including tobacco and ultra-luxury goods.

Prime Minister Narendra Modi, in his Independence Day speech on August 15, unveiled the plan for GST reforms. Shortly thereafter, the Centre shared a blueprint of the planned reform with a Group of Ministers (GoM) from different states for initial vetting.

Also read: Opposition-ruled states meet, seek compensation to greenlight GST rejig

According to the sweeping rate change proposal put forth by the Centre and vetted by a group of state finance ministers, as many as 99 per cent of items in the 12 per cent category, such as butter, fruit juices, and dry fruits, would move to a 5 per cent tax rate.

Similarly, electronic items such as ACs, TVs, fridges, and washing machines, as well as other goods such as cement, will be among the 90 per cent of items that will move from 28 per cent to a lower 18 per cent slab.

As many as eight sectors — textiles, fertiliser, renewable energy, automotive, handicrafts, agriculture, health and insurance — will benefit the most from the rate overhaul, says the Centre’s blueprint for GST reforms.

Compensation demand

While Opposition-ruled states have demanded that all states be compensated for the revenue loss they incur after the implementation of the GST rejig, Andhra Pradesh Finance Minister Payyavula Keshav said his state is supporting the Centre’s GST rate proposals.

“As an alliance partner, we are supporting the Centre’s proposal of GST rate rationalisation. It is in favour of the common man,” Keshav told reporters before the Council meeting. Andhra Pradesh’s Telugu Desam Party (TDP) is an ally of the BJP-led NDA government at the Centre.

Also read: Will GST rejig rewrite history, spur consumption and growth?

On Wednesday morning, before the Council meeting, eight Opposition-ruled states — Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal — held their own meeting to formalise their strategy and reaffirmed their demand for revenue protection to give approval to the rate rejig.

Jharkhand Finance Minister Radha Krishna Kishore told reporters in Delhi that his state will suffer a Rs 2,000-crore revenue loss if the Centre’s GST rate reform proposal is implemented. “If the Centre agrees to compensate us for whatever loss we will incur, we have no issues in approving the agenda before the Council. I don’t think the issue will come up for voting, as in a federal structure, it is the responsibility of the Centre to compensate states for revenue loss,” Kishore said after the meeting.

Current structure

Under the present GST structure, the 18 per cent slab accounts for a lion’s share or 65 per cent in GST collection. The 5 per cent slab contributes 7 per cent to the total GST kitty. The top tax bracket of 28 per cent on luxury and sin goods contributes 11 per cent of the revenue, while the 12 per cent slab accounts for just 5 per cent of the revenue.

The Centre’s GST reform proposal put forth before the Council rests on three pillars — structural reforms, rate rationalisation, and ease of living. The structural reforms would ensure stability and predictability by providing “long-term clarity on rates and policy direction to build industry confidence and support better business planning”.

Also read: GST rates rejig: Why states have a strong case for compensation

On the “ease of living” side, the finance ministry’s proposal includes seamless, technology-driven GST registration, especially for small businesses and startups. It also suggested the implementation of pre-filled GST returns and faster, automated processing of refunds for exporters and those with an inverted duty structure.

“The next-generation GST reforms... will set an economy absolutely open and transparent in the coming months and with further reduction in compliance burden, (reforms) will be making it easier for small businesses to thrive,” Sitharaman said at the Foundation Day celebrations of the Tamil Nadu-based City Union Bank on Tuesday.

(With agency inputs)