GST reforms will not pose major fiscal burden on government — Report

NEW DELHI — The recent Goods and Services Tax (GST) rationalisation will not have a significant fiscal burden on the government, a Crisil report has said.

The government has estimated a net loss of an annualised Rs 48,000 crore in revenue in the short term on account of GST reforms.

Total GST collections in the previous fiscal were Rs 10.6 lakh crore; hence, the loss does not seem significant, according to a Crisil Ratings report.

Citing the method of recalibration of the tax rates, the report emphasised that the move to reduce rates will unlikely to pose a major pressure on the government revenue.

"As of fiscal 2024, the majority (70-75 per cent) of GST revenue came from the 18 per cent slab. Only 5-6 per cent was from the 12 per cent slab and 13-15 per cent from the 28 per cent slab," the report noted.

Reducing the tax rates of items from 12 per cent may not render a significant revenue loss.

Meanwhile, tax rates are unchanged on several fast-growing services, such as mobile tariff charges.

New services such as e-commerce delivery were also brought under GST and are taxed at 18 per cent, and some increase in disposable incomes due to benefits on other mass consumption items could further drive up their demand and tax collections, the report highlighted.

Differentiated taxes between lower- and higher-value items within a category can also help mitigate the fiscal impact, the report highlighted.

For instance, the rate was hiked for higher-value items of clothing and two-wheelers even as taxes on lower-value items were lowered.

"Premium demand from upper-income segments could remain intact, supporting revenue," the report stated.

Additionally, GST simplification from four to two slabs can bring more goods and services under the formal net, which could gradually support tax buoyancy over the medium term.

While their impact on consumption depends on the speed and the extent to which the GST cuts are passed to consumer prices, tax cuts on essentials can increase purchasing power, creating a broader boost for consumption gradually, the report noted.

Alongside, there are other macro tailwinds for consumption this fiscal, such as low inflation, easing borrowing costs, the government’s income-tax relief announced at the start of this year and healthy agriculture.

The new GST rates will come into force on September 22 and play out over the second half of this fiscal.