Arun Jaitley, former finance minister of India. (Photographer: SeongJoon Cho/Bloomberg)

GST May Become A Two-Rate Tax With Merger Of 12%, 18% Slabs, Says Arun Jaitley

The 12 and 18 percent tax slabs in Goods and Services Tax could be merged going forward as revenues increase, thereby effectively making GST a two-rate tax, former finance minister Arun Jaitley said on Monday.

In a Facebook post marking GST's second anniversary, Jaitley said as many as 20 states are already showing more than a 14 percent increase in their GST revenues and do not require the central government to compensate them for revenue loss arising out the tax’s implementation.

Jaitley, who in May wrote to Prime Minister Narendra Modi expressing his unwillingness to be a minister in the new government due to health reasons, said most consumer-facing items are now in the 18 percent, 12 percent and even 5 percent tax slabs.

The GST Council, chaired by the union finance minister and comprising state finance ministers, has reduced tax rates over the last two years. This led to revenue loss of more than Rs 90,000 crore, Jaitley said.

“Except on luxury and sin goods, the 28 percent slab has almost been phased out. Zero and 5 percent slabs will always remain. As revenue increases further, it will give an opportunity to policymakers to possibly merge the 12 percent and 18 percent slab into one rate, thus, effectively making the GST a two-rate tax,” he said.

Observing that a sudden GST rate cut on all categories of goods can lead to a massive loss of revenue for the government leaving it without resources to spend, Jaitley said "this exercise had to be done in a gradual manner as the revenues increased".

From July to March 2017-18, the average revenue collected was Rs 89,700 crore per month. In 2018-19, the monthly average increased by 10 percent to Rs 97,100 crore.

"The fear of the states today is that for the first five years they get a guaranteed 14 percent increase. The lurking doubt is as to what will happen after five years? Every state has been paid its share of tax as also from the compensation fund, if necessary. We have just completed two years of GST,” he said. "Already after the second year, twenty states are independently showing more than a 14 percent increase in their revenues and the compensation fund in their case is not necessary."

Stating that a one-rate GST is possible only in extremely affluent countries where there are no poor people, he said it would be inequitable to apply a single rate in countries where there are a large number of people below the poverty line.

"In the pre-GST regime, the rich and the poor, on various commodities, paid the same tax. The multiple slab system not only checked inflation, it also ensured that the Aam Aadmi products are not exorbitantly taxed. Illustratively, a hawai chappal and a Mercedes car cannot be taxed at the same rate. This is not to suggest that the rationalisation of slabs is not needed. That process is already on," he said.

GST, which subsumed 17 local taxes, was rolled out on July 1, 2017. The GST currently has four slabs: 5, 12, 18 and 28 percent. On top of the 28 percent slab, a cess is levied on automobiles, luxury, demerit and sin goods.

Bloomberg Quint

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