With most states on board to raise revenue so that they do not have to depend on the Centre for compensation, the GST Council at its meeting next month is likely to consider a proposal to do away with the 5 per cent slab by moving some goods of mass consumption to 3 per cent and the remaining to 8 per cent categories, sources said.
Currently, GST is a four-tier structure of 5, 12, 18 and 28 per cent. Besides, gold and gold jewellery attract a 3 per cent tax. In addition, there is an exempt list of items like unbranded and unpacked food items which do not attract the levy.
Sources said to augment revenue the Council may decide to prune the list of exempt items by moving some of the non-food items to a 3 per cent slab.
The move comes when most states are on board to raise revenue to no longer be dependent on the central government for compensation. To augment revenue, the GST Council may decide to prune the list of exempt items by moving some of the non-food items to a 3 per cent slab, sources added. They further stated that discussions are taking place to hike the 5 per cent slab to either 7 or 8 or 9 per cent. The GST Council, comprising finance ministers of both Centre and state, will take a final call on the matter.
The 5 per cent slab mainly includes packaged food items. Every 1 per cent hike in the 5 per cent slab would roughly yield additional revenue of Rs 50,000 crore annually, according to calculations. The GST Council is most likely to go for an 8 per cent tax for most items that currently attract a 5 per cent levy, however, various other options are also under consideration.
Under GST, essential items are either exempted or taxed at the lowest rate while luxury and demerit items attract the highest tax. Luxury and sin goods also attract cess on top of the highest 28 per cent slab. This cess collection is used to compensate states for the revenue loss due to the GST rollout. With the GST compensation regime coming to an end in June, it is imperative that states become self-sufficient and not depend on the Centre for bridging the revenue gap in GST collection.
At the time of GST implementation on July 1, 2017, the Centre had agreed to compensate states for five years till June 2022 and protect their revenue at 14 per cent per annum over the base year revenue of 2015-16. The GST Council over the years has often succumbed to the demands of the trade and industry and lowered tax rates. For example, the number of goods attracting the highest 28 per cent tax came down from 228 to less than 35.
With the Centre sticking to its stand not to extend GST compensation beyond five years, states are realising that raising revenues through higher taxes is the only option before the Council.
