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GST average rates need correction, finance minister says

The GST Council has over the years reduced several tax rates, resulting in an average rate of about 11.5 percent against the so-called revenue-neutral rate of 15 percent

June 29, 2022 / 07:27 PM IST

Goods and services tax (GST) rates need to be corrected, according to India’s finance minister, who hinted that rationalisation moves could be considered going ahead.

“It is one thing for technology to correct anomalies and any kind of inefficiencies and therefore have a positive bearing on the collections, but you would definitely be cognizant of the fact that the revenue-neutral rate… has been breached to the disadvantage of the system,” Nirmala Sitharaman said at the end of the two-day GST Council meeting in Chandigarh.

“Rate rationalisation, as and when it happens, if it results in an increase, is also making up for the kind of inefficiencies… the collateral for which is being borne by some other activities in the value chain.”

India’s GST Council has over the years reduced several tax rates, resulting in the lowering of the average rate to about 11.5 percent from the so-called revenue-neutral rate of 15 percent. The revenue-neutral rate is the rate at which income to the states and the Centre isn’t eroded in absence of pre-GST taxes.

This hurts revenue collections for both the Centre and states. Governments in India have seen significant stress on their balance sheets over the last couple of years since the pandemic.

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At its meeting, the GST Council accepted the recommendations of a group of ministers (GoM) on correcting the so-called inverted duty structure and pruning the list of exemptions but gave it three months to decide on rate rationalisation measures.

Several states have also sought the extension of goods and services tax compensation to them beyond the June 30 deadline.

After nosediving in the wake of the coronavirus pandemic, India’s monthly GST collections have remained above Rs 1 lakh crore for nearly a year, raising hopes that the tax system is settling down. The GST Council today recommended more measures to boost compliance.

The group of ministers on rate rationalisation was said to have considered raising the GST rate slabs. However, several experts, including member of parliament Sushil Kumar Modi are of the view that raising rates at this point of time might not be feasible due to price pressures in the economy.

India's retail inflation is likely to stay above the central bank's tolerance zone of 2 to 6 percent for three consecutive quarters, leading to the central bank's failure in meeting its inflation-fighting objective.

The Reserve Bank of India’s rate-setting panel increased the repo rate by 40 basis points in an unscheduled meeting on May 4 and by 50 basis points on June 8, leading to speculation over how many rate hikes will be announced to curb inflation.
Siddharth Upasani is a Special Correspondent at Moneycontrol. He has been covering the Indian economy, economic data, and monetary and fiscal policies for nine years. Contact: siddharth.upasani@nw18.com
first published: Jun 29, 2022 05:05 pm
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