Increased Lowering of Goods and Services Tax (GST) Rates Carry Wider Economic Impact Than Income Tax Reductions, According to a Report

Increased Lowering of Goods and Services Tax (GST) Rates Carry Wider Economic Impact Than Income Tax Reductions, According to a Report

The Indian government is set to implement GST rate reforms, marking the second major fiscal stimulus in the upcoming financial year (FY26) after the personal income tax cuts announced earlier in the budget. This move is aimed at simplifying the current complex GST system, which currently consists of several slabs: nil tax rate, 3%, 5%, 12%, 18%, and 28%.

One of the key concerns surrounding the rationalisation of GST rates is the potential annual revenue loss. According to a report, the reforms could lead to a loss of Rs 0.7-1.8 trillion, with states bearing a higher share of the burden.

However, the benefits of a GST rate cut are not all negative. Lower GST rates are expected to benefit discretionary consumption in high-ticket items such as automobiles and air conditioners during peak festive demand. If the benefits are passed on to consumers, it can boost the country's GDP growth by 20-50 basis points.

The toy industry, among others, has faced issues due to the complexity of the current GST system. Simplification of GST rates could bring more businesses into the tax system, particularly micro, small, and medium enterprises (MSMEs) that earlier avoided GST. Over time, expanding the GST tax base and improving compliance through the inclusion of more businesses could be a result of simplifying GST rates.

The report also suggests that a decrease in income tax rate would have a positive multiplier effect, but GST has the highest multiplier effect due to being an indirect tax that applies to the entire population at the point of sale. This is supported by the finding that a decline in the GST rate has a higher multiplier effect of 1.08x compared to direct taxes.

To partly offset the revenue uncertainty caused by GST rate reforms, Ambit Capital suggests applying a higher GST rate of up to 40 per cent on sin and luxury goods. Some items also attract additional taxes as cess under GST, such as cut and polished diamonds (1.5%) and rough diamonds (0.25%).

Despite the potential challenges, the GST rate reforms could have a significant positive impact on the economy. For instance, having multiple GST rates has increased complexity in the system, according to the report. Simplification of GST rates could help reduce this complexity and promote a more efficient and transparent tax system.

It is important to note that the search results do not provide any information about the company that wrote the reported report about GST tax rates. The article does not provide information about the EPFO 3.0 launch or its key benefits for PF subscribers, as this information is not relevant to the topic of the GST rate reforms.