Karnataka poll result likely to impact GST rate rejig exercise

Karnataka election result is likely to have an unusual impact on rationalisation of Goods & Services Tax (GST) rates.

With the defeat of BJP government, the GST Council needs to reconstitute the Group of Ministers (GoM) on Rate Rationalisation as it has outgoing Chief Minister of Karnataka Basavaraj S Bommai as the convenor.

Though the GoM had submitted an interim report and the GST Council recommended some changes to pre-packaged, pre-labelled items, etc., the GoM is is yet to give its final report.

Now, the GoM will restart deliberations only after the appointment of new convenor, further delaying the formulation of the final report.

In December, businessline had reported that GST restructuring is likely only after 2024 Lok Sabha poll due to two key issues—high inflation and political implications. Though the inflation has come down, political aspects still dominate the scene.

Since rate rejig is likely to take some items from lower to higher rate bracket and some items from high to low rate, the entire exercise is expected to be inflation prone and government may not be interested in taking such a step.

Also read: Karnataka election results: Lotus wilts, handy win for Congress

Higher revenue in the existing rate regime is likely to compel the government from initiating changes, at least for the time being.

Besides four main rates— 5, 12, 18 and 28 per cent, there are some special GST rates such as 0, 0.25, 1 and 3 per cent in the existing rate structure. There have been demands to bring down the number of rates. There was a suggestion to merge 12 and 18 per cent and adopt a median rate of 15 per cent. Alternatively, 5 per cent and 12 per cent can be merged to 8 per cent. Various other permutations and combinations were being considered for rate rationalisation.

In September 2021, the GST Council discussed the need to undertake GST rate rationalisation, including correction of inverted duty structure with an objective to simplify the rate structure, reduce classification related disputes and enhance GST revenues. Accordingly, GoM was set up with representatives from Bihar, Goa, Kerala, Rajasthan, West Bengal, and Karnataka, while Bommai being the convenor.

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According to terms of reference for the GoM, the panel is required to review the supply of goods and services exempt under GST with an objective to expand the tax base and eliminate breaking of ITC (Input Tax Credit) chain.

It will review the instances of inverted duty structure (higher rate on input and lower rate on output) other than where Council has already taken a decision to correct the inverted structure and recommend suitable rates to eliminate inverted duty structure as far as possible so as to minimise instances of refund due to inverted duty structure.

It will review the current tax slab rates and recommend changes in the same as may be needed to garner required resources. Also, it has been asked to review the current rate slab structure of GST, including special rates, and recommend rationalization measures, including merger of tax rate slabs, required for a simpler rate structure in GST.