GST Rate Rationalization: Impact on Lower Income

The potential for GST rate rationalization in NDA 3.0’s agenda faces complexities following a reduced mandate in the Lok Sabha elections, analysts caution. They suggest that reducing the number of GST slabs from four to three could impact lower-income groups adversely, a concern the government is keen to avoid. A Group of Ministers (GoM) is deliberating on consolidating the current slabs of five percent, 12 percent, 18 percent, and 28 percent into three broader categories.

Sources close to the matter, preferring anonymity, indicate a reluctance to proceed swiftly with rationalization due to fears of discontent among rural and economically weaker segments. Essential and semi-essential goods, which constitute a substantial part of India’s consumption, are currently taxed at five percent, 12 percent, or 18 percent. Any move to lower rates on semi-essential items could potentially increase taxes on essential items, affecting affordability for the masses.

The GoM, led by UP Finance Minister Suresh Khanna, has yet to finalize its recommendations. The challenge lies in balancing revenue considerations—particularly from luxury items taxed at 28 percent—and the impact on different consumer segments. Experts argue that while simplifying GST rates to three slabs could streamline tax administration, the immediate effects on consumer prices and government revenue must be carefully weighed.

Furthermore, the role of states in the GST Council remains crucial, with their collective two-thirds majority influencing policy decisions. Regional disparities and consumption patterns among states add complexity to rate rationalization discussions. Industry voices emphasize the need for clarity and predictability in tax rates to reduce compliance issues and legal disputes

Overall, while there is a push towards simplifying GST rates, the intricacies involved in balancing fiscal goals and socio-economic impact necessitate cautious deliberation before any significant restructuring is implemented.