GST tax rate at 12.2%, much below revenue neutral rate, says FM Sitharaman

Finance minister Nirmala Sitharaman

Union Finance Minister Nirmala Sitharaman has said the Goods and Services Tax (GST) rate is much below the revenue neutral rate (RNR), originally suggested at 15.3 percent. The current average GST rate has decreased to 12.2 percent as of 2023, she said.

The comments come ahead of the 54th GST Council meeting on September 9 in New Delhi, which will be closely tacked for relief, if any, for the real estate sector and health and life insurance buyers.

“We are much below the revenue neutral rate in GST,” Sitharaman said, underscoring the government's focus on increasing revenue collections but not before easing the compliance burden. “We need to raise revenue, but simplifying, easing, and ensuring compliance for taxpayers comes first,” the minister said at an event organised by the Revenue Bar Association.

The revenue neutral rate is the rate of tax at which the government collects the same amount of revenue even after changes in tax laws. Since its implementation, the GST system has undergone several revisions to streamline the process and promote ease of doing business.

Sitharaman reiterated the government’s commitment to simplifying tax compliance while maintaining a balance between the Centre’s fiscal needs and the ease of administration for citizens.

The finance minister denied there was friction between the Centre and states, stressing the importance of the federal structure in the GST framework. “The federal structure in GST has to be respected, so that both the Centre and states can work together to widen the tax base and promote developmental activities — that’s exactly the spirit with which we work,” she said.

A Reserve Bank of India’s study of states’ finances published in 2023 said that states' tax revenue as a percentage of their overall tax revenue had gone up in recent years to 65.4 percent on average from 62.8 percent prior to the rollout of GST. It indicated that the states’ dependence on tax devolution from the Centre reduced slightly since the introduction of GST.

Sources of tax revenue that states still control, apart from fuel, include stamp duty, land registration fees, excise duty on liquor and motor vehicle tax.

States that have seen the largest increase in the share of their tax revenue after the introduction of GST include Telangana, Andhra Pradesh, Uttar Pradesh and Odisha.