Demand boost from GST restructuring will address any revenue losses
What's the story
The proposed restructuring of the Goods and Services Tax (GST) rates could initially impact state revenues. However, the resulting surge in demand and consumption is likely to compensate for this loss, said S Mahendra Dev, Chairman of the Economic Advisory Council to the Prime Minister (EAC-PM). The changes are aimed at boosting demand by removing 12% and 28% slabs.
Anticipated impact
Consumption boost estimated at ₹5.5L crore
Dev told Moneycontrol that the reduction in GST rates after these changes will lead to higher consumption and growth. He cited an SBI Research estimate that the combined impact of income tax rate cut and GST reforms could result in a consumption boost of ₹5.5 lakh crore. The proposed two-rate structure would shift 90% of items currently in the 12% and 28% slabs to lower brackets.
Economic growth
Proposed GST rates may lead to revenue loss for states
Dev also said that the total increase in aggregate demand due to GST reforms is ₹1.98 lakh crore, which translates into a 0.6% increase in GDP. He clarified that while the proposed new GST rates may lead to revenue loss for states, these concerns will be addressed during the upcoming GST Council meeting.
Compliance boost
Offset revenue loss with increased tax collections
Dev emphasized that lower GST rates could encourage more consumption and compliance. This, in turn, would lead to an increase in tax collections that can offset any revenue loss. He also clarified that the government's fiscal targets wouldn't be derailed by these changes. The Finance Ministry has indicated that if approved by the GST Council, the revenue neutral rate (RNR) could fall below 10%.