The Goods and Services Tax (GST) has proposed a colossal reform by moving into a two-tier system. Under the new system, merit goods would be charged 5%, whereas ordinary goods and services would be charged 18%. The increased 40% rate would only be charged on a few demerit goods like tobacco and pan masala.
GST operates with four broad categories of 5, 12, 18, and 28% and special tax rates on precious metals and stones. There is a compensation cess on products such as aerated drinks, motor vehicles, and tobacco products. The transition to the proposed framework will first be debated by a committee of state finance ministers before being discussed at the GST Council.
A report issued by SBI Research says the simplified structure of GST would increase consumption by 1.98 lakh crores. The study also mentioned a potential revenue loss of Rs 85,000 crore per annum. If the new terms are enforced as early as October, the projected loss in the present financial year would be Rs 45,000 crore.
According to the report, the average GST rate, which decreased to 11.6% in September 2019, down from 14.4% in 2017, may be reduced to 9.5%. Reductions in mass-use goods, including food and clothing, would boost household spending and contribute 0.6% to the GDP.
SBI Research estimated that the intended GST reforms would contribute to a decline in consumer price index (CPI) inflation of 2025 basis points. Given that 60% of the GST reduction to consumers is passed on, food inflation may soften by 1015 basis points. This rationalisation of service rates would also reduce inflation by 510 basis points, assuming a 25% pass-through.
Added to the new income tax cuts declared in the last Union Budget, the total increase in household consumption may increase to a record high of Rs 5.31 lakh crore. This is 1.6% of GDP, signifying the possible effect of government tax changes. Prime Minister Narendra Modi announced in his Independence Day speech about the GST 2.0 plan, and he wanted the new structure to be implemented before Diwali.