Rate revision - Whether with Sound Rationale?

While cheering the actions of a hero, the adrenaline rush of the heroic act stimulates the brain eclipsing the ability to look at repercussions. The rate rationalisation under GST is a major heroic act when seen from the eyes of wiping out rates of 12% and 28% and bringing in 5%, 18% and 40%.

The factors weighing in favour of moving towards fewer rates are aligning with concept of GST/VAT in world economy wherein ideal rate is a single rate and hence this would make the market more conducive for investments, and for the consumers it can be labelled as beneficial when the items of staple consumption are being available at reduced rate. In addition to this, ease of compliance for tax payer and administration would also be relevant.

But, there are other weighing factors , both at macro and micro level. At the macro level, the first question would be whether the whether the states are going to be adequately compensated with the rate revisions. Considering that the crutches of compensation cess is still what makes the states walk, whether the rationalised rates would be sufficient for the States especially when there is no inclination for the GST council to extend compensation cess. The impact of the this would be felt more with consumer states like Kerala, where there will be substantial reduction in revenue when rate reduction is not backed up by any promise of compensatory inflow . As per the last economic survey report (2025), among the state specific taxes GST was expected to see maximum growth when compared to stamps and registration, sales tax, sales excise duties, and other taxes. Therefore how the rate revision would affect the stabilising effect GST has been picking up on states is to be analysed.

Again , quoting from last economic survey report, the impact of the rate rationalisation on tax buoyancy -GDP ratio ( ratio of change in tax revenue to change in GDP ) has been going on steady and therefore when GDP is on the march towards global average , a sudden splash of reforms would result in decreased tax buoyancy is also to be seen.

GST on Real Estate & Works Contracts – Your Ultimate Guide to GST in the Real Estate Sector! Click here

Let us pause for a moment and remember the recommendation of committee given in 2015 regarding the Revenue neutral rate (RNR). Considering the impact of absorbing other existing taxes and revenue loss to states, the RNR was recommended to be 15 to 15.5 %. This would mean the higher or lower rate had to be both above and below this. The recommendation was for lower rate of 12% and higher rate of 16-18% with white goods and sin good taxed at 40%. Any rate rationalisation without considering the ideal RNR , and going too below or too above would have long term impact on economy. Another risk would be if hike in prices of petroleum products and also other state specific land revenues and stamp charges if states are not able to manage from GST revenue. The real real impact can be analysed only by seeing the enhanced revenue on account of escalation from 12% to 18% vis a vis decreases in revenue from 12% to 5% and 28% to 18%. Consumer states would be at a loss when then the balance is tilting towards over all reduction in revenue.

Lastly, the immediate impact is going to be felt by the tax payer, who after the falls and struggles of toddler years has been entering the stage of stability. For them, one more cycle of issues from adjustment of credit on closing stock, to changing MRP and passing on reduced rate to consumers and impact of removal of compensation cess and shifting to 40%, would land them back in to a situation where they were in 2017.

Sindhu Mangat, Advocate, Swamy Associates, Kerala.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates