Nirmala Sitharaman meets GST GoMs; explains necessity of tax reforms

The finance minister’s address to the GoMs was for about 20 minutes during which she elaborated on the Centre’s proposal, a source said.

Finance Minister Nirmala Sitharaman on Wednesday presented to GoMs from states her government’s plans for sweeping reforms in the GST regime that involves slashing tax rates and easing compliance burden for businesses.

The GoMs on rate rationalisation, insurance taxation and compensation cess will over two days deliberate on the Centre’s ’next-gen’ GST reforms under which tax will be levied at 5 and 18 per cent rates. A special 40 per cent rate has been proposed on 5-7 items, including sin goods. GST is currently levied at 5, 12, 18 and 28 per cent.

While food and essential items are either at nil or 5 per cent rate, luxury and demerit goods are in 28 per cent slab, with a cess on top of it. The finance minister’s address to the GoMs was for about 20 minutes during which she elaborated on the Centre’s proposal, a source said. She explained the necessity for GST reforms to the states, the source added.

The group of ministers (GoM) on compensation cess was set up to decide on the future of compensation cess post the loan repayment period. Besides, the GoM on insurance was deliberating on reducing tax rates on health and life insurance premium.

The rate rationalisation GoM was mandated to suggest changes in slabs and rates and also remove duty inversion faced by certain sectors. The GoM on GST rate rationalisation is scheduled to meet again on August 21.

As per an SBI Research report, the proposal, if implemented, could result in revenue loss of about Rs 85,000 crore a year. For the current fiscal, the loss to revenue is estimated at Rs 45,000 crore assuming the new tax rates are implemented from October 1.

The Centre’s proposal once approved by the GoMs will be placed before the GST Council, comprising ministers from Centre and all states, in its meeting next month. Prime Minister Narendra Modi has announced rollout of the GST reforms by Diwali. The SBI Research report estimated that the effective weighted average GST rate came down from 14.4 per cent at the time of inception to 11.6 per cent in September 2019. Given the current rationalisation of rates, the effective weighted average GST rate may be 9.5 per cent.