InvestorQ : Why is the GST Council planning to increase GST rates all over again? Is it because of GST revenue shortfall? Will the GST rate hike be positive or negative?
Rashi Mehra made post

Why is the GST Council planning to increase GST rates all over again? Is it because of GST revenue shortfall? Will the GST rate hike be positive or negative?

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sarah Leo answered.
2 years ago
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There is in fact a major revenue shortfall on GST and this gap has only been growing over the last two years since its launch. Since the launch of GST in July 2017, the government has struggled month after month to get close to the target. The shortfall on GST was Rs.1.25 trillion last fiscal and this year it is likely to be closer to Rs.2 trillion. It is unclear how this gap will be bridged. The current effective rate of GST is 11.6%, which is sharply lower than the revenue neutral rate of 15.4%. This is a clear revenue loss of Rs.2.50 trillion. The GST plan could look like this. Healthcare services by expensive hospitals and all forms of hotel accommodation could come under the ambit of GST. In addition, a number of items under the 5% GST bracket like economy air travel, AC train travel, tour services, outdoor catering, branded cereals and flour could be moved from 5% to 10%. The GST Council also plans to abolish the 12% slab and move items like high-end hotel rooms and business class air travel to the 18% bracket. One cannot rule out the imposition of penal duties on products like cigarettes and other luxury products. State cess on petrol and diesel could also be hiked to make up for the shortfall.

Clearly, hiking GST rates is not a very good idea at multiple levels. When GST was launched in July 2017, the core purpose was to bring more businesses into the organized segment and improve collections. That was supposed to be done through lower rates and efficiency of transactions. By hiking rates sharply, both the merits would be lost. It would not really differ from the old system and companies will be apprehensive about investing in logistics to enhance efficiency. Secondly, there is an inflation aspect that cannot be ignored. For example, hiking GST on food products and a host of services will actually push inflation higher. With the RBI already fighting against rising inflation, this could only make the task harder for the central bank. Lastly, higher effective rates would leave no incentive for the unorganized sector to enter the economic mainstream. Inflation could be the immediate worry for GST hike.

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