The central government is preparing for a major change in the Goods and Services Tax (GST) system. This time, a proposal for GST 2.0 reforms has been presented, which will soon be discussed by the committee of finance ministers of the states. The latest report of state-run bank SBI Research shows that even though the government may have to suffer a revenue loss of about Rs 85,000 crore due to these reforms, the country’s consumption will increase by about Rs 1.98 lakh crore in return.
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Direct benefit to common people and the market
According to SBI Research, the new tax rates will save more money in people’s pockets, which will increase their spending and bring new energy to the economy. The report says that the tax cut will reduce the prices of everyday items like food and clothing. This can reduce the Consumer Price Index-based inflation by 0.2 to 0.5 percent. It will also have a positive impact on retail inflation.
New tax structure of GST 2.0
According to the proposal put forward by the Center, there will now be only two rates – 5 percent and 18 percent. At the same time, harmful items like pan masala and tobacco can be taxed up to 40 percent. On the one hand, this will give additional revenue to the government; on the other hand, the common consumer will get essential commodities at a cheaper rate.
Effect of reduction in tax rates
When GST was implemented in 2017, its effective average rate was 14.4 percent. But by 2019, it came down to 11.6 percent. Now SBI estimates that after the new tax structure, it can come down further to 9.5 percent. This will prove beneficial for both consumers and industry.
There will be a revenue deficit in the current financial year
SBI Research estimates that the government will have to bear a loss of about Rs 45,000 crore in this financial year itself. However, on the other hand, by adding tax cuts and exemptions given in income tax, additional consumption of Rs 5.31 lakh crore is expected in the economy. This is about 1.6 per cent of India’s GDP.
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Current GST rates
The current GST regime (GST 1.0) has four major slabs – 5 per cent, 12 per cent, 18 per cent, and 28 per cent. These rates apply to most goods and services. GST 2.0 plans to simplify and rationalise the structure by reducing these rates.