GST Rate Rejig To Give Rs 1.98-Lakh-Crore Consumption Boost: SBI Research

The proposed Goods and Services Tax reforms through a two-tier tax structure and lower tax rates on household goods will lead to an estimated average revenue loss of Rs 85,000 crore a year, but will boost consumption by Rs 1.98 lakh crore, SBI Research Report said on Tuesday.

The Centre has proposed a 'next-gen GST' under which the GST will be a two-rate structure of 5 and 18% based of classification of items as 'merit' and 'standard'. Also, a 40% tax will be levied on five to seven select goods, including demerit goods like pan masala and tobacco.

SBI Research Report estimated that the effective weighted average GST rate has come down from 14.4% at the time of inception to 11.6% in September 2019. Given the current rationalisation of rates, we believe that effective weighted average GST rate may come down to 9.5%.

However, the consumption boost, which totals for a 0.6% increase in GDP, would not stoke inflation as taxes on mass consumption items are going to go down in the proposed GST regime.

Overall, we believe consumer price index inflation may be moderated in the range of 20 to 25 basis points.

Since the GST rate of essential items (food, cloth, etc.) is expected to decline from 12% to 5%, the CPI inflation in this category may also come down by 10-15 basis points after considering a 60 per cent pass through effect on food items.

Apart from this, the rationalisation of GST rates of services also leads to another 5-10 bps reduction in CPI inflation on other goods and service items, considering a 25% pass through effect.

"The GST 2.0 regime, while also involving an average revenue loss of Rs 85,000 crore, is estimated to have boosted consumption by Rs 1.98 lakh crore," SBI Research said. For the current fiscal, the loss to revenue is estimated at Rs 45,000 crore assuming the period of new tax rates as October-March.

Taking together the benefits of income tax tax rate cuts announced in Budget for current fiscal, the combined impact of both measures amounts to an additional Rs 5.31 lakh crore of consumption expenditure in the economy. This translates into approximately 1.6% of GDP, as per its estimates.

The Centre's proposal will be discussed by a panel of state finance ministers on Wednesday and Thursday. Once approved, it would be placed before the GST Council in its meeting next month.

The current GST structure (GST 1.0) consists of four main rate slabs: 5, 12, 18 and 28% These rates apply to most goods and services.

In addition to the main slabs, there are three special rates: 3% on gold, silver, diamond and jewellery, 1.5% on cut and polished diamonds, and 0.25% on rough diamonds.

A GST Compensation cess is also levied on select goods such as tobacco products, aerated drinks and motor vehicles at varying rates. This cess is used to compensate states for any revenue loss resulting from the transition to the GST system.

During the 79th Independence Day speech on Aug. 15, Prime Minister Narendra Modi announced the next-generation reform in GST in the form of rate rationalisation (GST 2.0). He said that the GST reforms would be announced by Diwali.