GST Council may eliminate the 5% GST rate slab next month

The GST Council is looking into eliminating the 5% GST rate slab in the next month’s Council meeting, as revealed in a PTI report.

Many states are resonating with the idea of increasing revenue collections to avoid their dependency on the central government for compensation. Amidst this development, the GST Council is organising the 47th GST Council meeting in May 2022. The Council will likely propose the elimination of the 5% GST rate slab. Instead, it expects to shift many mass consumption products or essentials to a 3% GST rate slab. It may introduce an 8% GST rate slab for the remaining categories.

Presently, GST is a four-level tax structure consisting of 5%, 12%, 18% and 28% rates. Other than these, gold and jewellery come under a 3% tax slab. Moreover, certain items are exempted, such as the food items that are unbranded and unpacked. The GST Council may take a call to restructure the list of exempted products by shifting some of the non-food products under the 3% tax slab. It will expedite the GST revenue augmentation process.

Sources have stated that deliberations are underway to increase the 5% GST rate slab to either 7, 8 or 9%. However, the GST Council will make a final decision, consisting of finance ministers of both the Centre and states.

As per computation, every 1% rise in the 5% slab, which primarily consists of packaged food items, would generate an estimated additional revenue of Rs.50,000 crore. Even though several options are being considered, the GST Council may mostly settle for an 8% GST rate slab for many items presently charged with a 5% tax rate.

Under the GST law, essential products are either taxed at lower or nominal rates or exempted. In contrast, luxury and demerit products have the highest tax rates. An additional levy of cess applies on such luxury and sin goods over and above the highest 28% tax slab. Such cess collection is utilised to compensate states for the loss of revenue due to the rollout of the GST system.

When GST was implemented on 1st July 2017, the central government had to compensate states for five years to protect their annual revenue rate at 14% compared to the base year revenue of 2015-16 through the compensation cess. While the GST compensation levy may end in June 2022, states must become self-sufficient and not depend on the central government to bridge the persisting gap in the GST revenue collection.

In 2021, the GST Council had set up a committee of state ministers, led by the Karnataka Chief Minister Basavaraj Bommai. The committee had to study and propose ways to increase the revenue collections through tax rate rationalisation and correction of tax anomalies. The Group of Ministers (GoM) may take until early May 2022 to decide and draft its recommendations. Their report will be tabled before the GST Council in its next 47th meeting, expected in mid-May.

For any clarifications/feedback on the topic, please contact the writer at annapoorna.m@cleartax.in