Rate slab Rationalisation in GST

Should the GST rates be rationalised to bring down the number of rates slabs.

The medium-term goal for GST has been to reduce the number of rates from the present four to two slabs. By definition, such a rationalisation would require raising tax rates on some goods/services while reducing on others.

Given that the tax system provides credit for input taxes paid, any change in the tax regime that increase taxes on commodities/services predominantly used as inputs would be counterproductive – duty-structure inversion could imply the need for subsequent changes in tax rates.

Further, with buyers claiming input tax credit the increased tax rates would not result in any additional revenue, even if the demand for these commodities, remains unchanged. In other words, for any such rationalisation, it would be useful for all goods and services to be classified into two categories – inputs to taxable activities and others.

Changes in tax rates on the latter are likely to have revenue implications, but those on the former are not. This process, however, would lead to changes in rate for many goods and services which could be disruptive. Such changes must be managed carefully, both politically and economically.

Another element in the discussion on rate rationalisation is the possibility of differentiation tax rates depending on the price of the commodity – lower tax rates on commodities with lower prices and higher rates for the rest. This regime is in operation for footwear and apparel. Goods valued below the thresholds are taxed at lower rates, while those above are taxed at a higher rate. These classifications are proposed with the intent of reducing the tax liability of lower-income households.

Recent reports on the deliberations of the Group of Ministers (GoM) on rate rationalisation suggest the possibility of segmenting additional commodities into multiple categories based on price.

However, rate rationalisation must keep in mind the cost of compliance and administration when proposing changes to the regime. Multiple slabs can encourage misreporting of values and mis-specification of contracts, which would impose an additional burden on tax administration and might lead to more disputes. Further, it appears that this process would take the regime away from the end goal of fewer tax rates rather than towards it.

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