A recent study by Crisil indicates that the government's recent Goods and Services Tax (GST) rationalisation will not put a huge fiscal burden.
Government estimates indicate that GST reforms would translate into a short-term annualised revenue loss of around ₹48,000 crore. But keeping in mind that overall GST collections in the previous financial year were at ₹10.6 lakh crore, the effect is still fairly contained, Crisil Ratings noted.
The report explained that the recalibration of tax rates should not significantly affect government earnings. "As of fiscal 2024, the majority (70-75 per cent) of GST revenue came from the 18 per cent slab. Only 5-6 per cent was from the 12 per cent slab and 13-15 per cent from the 28 per cent slab," it said. Due to this weighting, reducing rates on products in the 12 per cent category is not likely to make a big impact on revenue.
In addition, tax rates do not change for a number of high-growth service segments like mobile tariffs. Meanwhile, new services such as e-commerce delivery have been included under the 18 per cent GST slab. The report observed that increased disposable income due to lower taxes on mass consumption goods would increase demand, thus spurring collections.
Crisil also noted that introducing differentiated rates under the same category can mitigate the fiscal impact. For instance, whereas rates on lower-value articles of clothing and two-wheelers have been reduced, rates on their higher-value counterparts have been raised. "Premium demand from higher-income segments might be intact, favoring revenue," it noted.
Besides, the continuance of GST simplification — lowering the structure to two slabs from four — has the potential to widen the formal tax base, supporting revenue buoyancy in the medium term. While the consumption effect is subject to the speed and extent to which tax reductions are passed on to consumers, reduced rates on staples can increase purchasing power and over time foster broader consumption expansion, the report further stated.
Other demand-supporting factors during the year are low inflation, softening borrowing costs, income tax relief provisions put in place early in the year, and positive agricultural prospects.
The GST rate revisions go into effect on September 22 and will condition collections during the second half of the year.
Read also| Indian Launch of New BMW S 1000 R — Specs, Price, Top Speed & Details
Read also| GST Reforms Prompt Suzuki Motorcycle to Cut Two-Wheeler Prices by Up to ₹18,000
