The Fifteenth Finance Commission (FFC) has suggested the Goods and Services Tax (GST) Council to simplify tax rates by creating just three slabs, two officials with direct knowledge of the matter said on Sunday.

The suggestion is to come up with a standard rate of 17%, a lower merit rate for items of common consumption and a higher rate on luxury and sin goods, according to these officials who spoke on the condition of anonymity.

At present, the regime, billed as a game-changer by the government, has four rates (5%, 12%, 18% and 28%).

Speaking at the Hindustan Times Leadership Summit on December 7, Union finance minister Nirmala Sitharaman, too, put forth a similar view.

“Eventually, we will of course have to rationalise [the rates]. Do we want so many slabs? Do we want to have just two or three slabs? Original intent was that we have just the three —merit, sin and the standard; just the three rates,” she said.

The works of the GST Council and the Finance Commission are essentially complementary. Both are constitutional entities, and are independent in their domains, FFC chairman NK Singh told HT last week. They function in national interest, he added. He said the rationalisation of tax rates, the timing and sequence are the GST Council’s prerogative.

A section of policymakers representing the Centre and states is keen to rationalise the tax structure into three slabs to simplify the system and boost revenue collection, which is subdued, and therefore, a cause for concern, said the two officials mentioned cited above.

Falling revenue collection is one of the key concerns of the Council, which was part of its agenda for discussion at its 38th meeting on Wednesday.

The apex decision-making body on the indirect tax, however, deferred deliberation to its next meeting pending comprehensive data and analysis on this matter, the two officials. The Council, which is chaired by the Union finance minister and has finance ministers of states and Union Territories as its members, usually meets every two months.

As GST is a tax on consumption, the economic slowdown affected revenue collections for three consecutive months – August, September and October. In these months, the revenue collection was below the Rs 1 lakh crore benchmark. India’s gross domestic product (GDP) grew at 4.5% in the July-September quarter (Q2 2019-20), the lowest since March 2013.

Revenue collection, however, picked up in November, and touched Rs 1,03,492 crore due to the government-induced stimulus and a spur in demand during the festive season.

Speaking at the 37th GST Council meeting in September, the FFC chairman said there had been GST rate cuts since its inception in July 2017, and rarely there had been any increase, which upset the time frame for the tax regime to become revenue-neutral, said the two officials.

This resulted in a cluttered rate structure, and posed enormous challenges over compliance and challenges of technology. Therefore, time has come to go back to the drawing board and rationalise tax rates, the officials said.

“He [Singh] added that the multiple downward adjustments in the rate structure had two consequences. First, it had affected the revenue stream. Secondly, there was no clarity on the effective weighted GST rate currently in vogue. It was hence important to re-establish the revenue neutral rate,” said the first official, quoting the FFC chairman.

Vijay Kumar Gupta, a former Central Council Member of the Institute of Chartered Accountants of India (ICAI), said, “Several tax rates, cess, numerous compliance requirements and various exemptions have made GST a complex regime. Indeed, there is a need to rationalise tax rates. The idea of three rates is good… But, it shouldn’t be done in haste at a time when the economy is showing down.”

ASSOCHAM president Niranjan Hiranandani said any GST rate hike would be counterproductive at this juncture. “In order to revive the economy, I would suggest a 25% reduction in GST rates for only six months. It will spur demand and boost growth,” he said.