Transformative GST Rate Overhaul Highlighted in Editorial

The 56th meeting of the GST Council, a significant milestone in this country's economic history, has brought about a significant shift in the tax landscape. The decisions on tax reduction and rationalization, effective from the third week of this month, have been made by the GST Council comprising Union Finance Minister and State Finance Ministers.

The reform step, cutting across parties, has been warmly welcomed by the States. Post-GST, they have benefited from tax devolution, and the latest moves are expected to expand the tax base and offset export setbacks in labour-intensive goods.

The Council has agreed to reduce rates on a number of items of mass consumption. Consumers and producers can expect lower prices for items such as household use goods, food products, textiles, leather products, medicine, agriculture inputs, ACs, small cars, and bikes. Some goods will be zero-rated, and a thin category of 'sin goods' and luxury items will be taxed at 40 per cent. The average rate for goods may well be in the 8-10% range now.

The tax on health insurance has been reduced from 18% to nil, which is good news for many. However, there are doubts over the transmission of price cuts to consumers, particularly regarding the treatment of accumulated input tax credit on products whose duties will come down. In the absence of an anti-profiteering mechanism, the government should keep an eye out for possible sharp practices by producers.

Clarity is needed over whether this input tax credit may need to be set off against further sales before September 21, or 'reversed'. The Council has crunched a handful of rates to just two broad ones - 5 per cent and 18 per cent, for most goods and services. This dismantling of a harsh indirect tax structure for the benefit of lay citizens is a step towards making the tax system more transparent and consumer-friendly.

Estimates of revenue foregone range from ₹48,000 crore (over an unspecified period) to ₹85,000 crore over a year for the States and Centre. The growth push from the rate cuts is expected to allay apprehensions over revenue loss raised by some States. The GST Council has also maintained a punitive tax on luxury goods.

The GST Council's moves are expected to benefit both consumers and producers, with lower prices for goods and services and a broader tax base. Whether these benefits will be fully realised remains to be seen, but the reforms are a positive step towards a more efficient and equitable tax system.