5% GST slab may be increased to 6%: Panel considering ways to boost revenue

The panel for shoring up muted goods and services tax (GST) collection is examining slab restructuring by increasing the 5 per cent rate to 6 per cent to begin with — a move that can result in additional revenues of Rs 1,000 crore per month.

The 5 per cent slab covers essential commodities like basic clothing, footwear, and food items. The exercise assumes GST collection of Rs 1 trillion a month. According to the official data, the 5 per cent slab accounts for roughly 5 per cent of GST collection. 

However, the government’s monthly GST collection target is around Rs 1.18 trillion. Besides, the panel is considering increasing the compensation cess rate for cigarettes and aerated drinks, besides removing from the exemption list items that attracted some form of taxation in the pre-GST regime.

“An idea that has emerged is increasing the 5 per cent slab to 6 per cent, which will mean 3 per cent GST each for the Centre and states. Some states are arguing that this will mean a 20 per cent increase in the tax rate. But in value terms it will not be much,” said a government official.

The panel is likely to meet next week to compile views of officers and states.

About 60 per cent of the revenue comes from items in the 18 per cent rate slab, 13 per cent from items in the 12 per cent slab, 22 per cent from items under 28 per cent, and a small amount from the 5, 3, and 1 per cent slabs. 

The idea found support from experts. “… if the government believes that tax rate increase is the only option rather than selectively increasing it on a few items, it would be better to change the slab rate itself (except the 28 per cent slab) to, say, 19 per cent from the current 18 per cent and so on,” said Pratik Jain, partner, PwC India.

The panel is also looking at bringing under GST items like foodgrains that faced either value-added tax or purchase tax.

“There may not be much room to substantially increase revenue by taxing exempt items, unless the government is willing to consider taxing education and health care,” said Jain.

In addition, the panel is reviewing the compensation cess rates for sin items like cigarettes and aerated drinks. About 34 items falling under sin and luxury goods are taxed at 28 per cent and an additional cess is levied on a few items in the same slab. They include automobiles, cigarettes, and aerated drinks, which goes to compensate states for the revenue shortfall.

For the automobile sector, the cess ranges from 1 per cent for small cars to 22 per cent for SUVs. Due to economic slowdown, cess collection has fallen short of the compensation requirement of states, compelling the Centre to examine measures to boost collection.

“We are not looking at auto now, but the cess rate can go up in the case of cigarettes and aerated drinks,” said another official.

The current cess on cigarettes ranges from 5 per cent plus a flat Rs 2,076 per 1,000 sticks of up to 65 mm to 5 per cent plus Rs 3,668 for 1,000 sticks of up to 75mm.