A committee of officers set up to suggest ways to boost Goods and Services Tax (GST) revenue has proposed a two-slab structure of 10% and 20%, besides a higher rate on luxury and sin goods; imposition of cess on items such as cosmetics, gambling and recreational services; and withdrawal of exemptions on public school education, high-end healthcare facilities and air-conditioned public transport.

The changes were suggested in a presentation made to the GST Council last week, two people with direct knowledge of the matter said on condition of anonymity

The proposed rates of 10% and 20% will subsume the existing three rates of 5%, 12% and 18%. The presentation is silent on the rate at which luxury and sin goods are to be taxed, the people added, indicating that this could be different from the current 28%.

The panel also suggested increasing existing cess rates and having inflation-indexed specific levies, the two people said. In addition to ad valorem rates, cesses on various luxury items and sin goods attract levies at specific rates. For example, filter cigarettes attract a 5% cess and specific levies ranging from Rs 2,126 per thousand to Rs 4,170 per thousand depending on their length. Coal also attracts cess at Rs 400 per tonne.

“It is up to the GST Council to bring the suggestions on the table to discuss further. The presentation was part of the agenda of the 38th meeting [of the GST Council] and it has not yet taken any decision on this matter,” one of the two people cited above said. The council, which is the apex decision-making body on the indirect tax, is chaired by the Union finance minister and the finance ministers of states and union territories are its members.

The committee of officials suggested several measures to make the GST regime efficient and remove anomalies such as an inverted duty structure, which causes an annual revenue loss of Rs 20,000 crore. According to the panel, manufactured goods in the tax bracket of 5% and 12%, such as fertilisers, mobile phones, footwear, renewable energy equipment, and man-made yarns suffer from an inverted duty structure, where tax on finished goods is lower compared to the tax on inputs.

Some GST Council members and GST officials who did not wish to be identified, said revenue collection has not been buoyant mainly due to subdued consumption in a sluggish economy. Due to insufficient cess fund, the Union could not compensate states for their revenue shortfall in October and November. While transitioning to the GST regime in July 2017, the Union committed to compensate states if it could not raise their revenue by 14% annually for five years.

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. In November, partly because of the government’s efforts to boost consumption, and partly because of the festive season,the revenue collection from GST increased to Rs 1,03,492 crore.

West Bengal finance minister Amit Mitra cautioned against a knee-jerk reaction such as raising tax rates at this time, when the economy is decelerating, because this could hamper consumption. He is also against withdrawing GST exemptions. “Any tinkering with the list [of exempted items] would undo the hard work which has gone into the identification of the exempted goods and services and will adversely impact the common man,” he said in a letter written to the Council’s chairperson on December 16.

The first person said, “Out of the 24 exempted items, some are exclusively for the rich and affluent . Such high-end products and services include public schools charging more than Rs 1 lakh fee [per annum] and medical treatment in luxurious, five-star like hospitals.” Items in the list include cereals and pulses, fruits, vegetables, animal feed, salt, milk/cottage cheese/curd, printed books/newspapers, raw silk, sanitary napkins, organic manure and hearing aids.

Uday Pimprikar, tax partner and national leader, Indirect Tax Services at EY India said, “As per estimates, the average GST rates are materially lower than the revenue neutral rates. The analysis suggests that the deviation has occurred on account of the progressive expansion of exemptions and reduction of rates.”

According to Pratik Jain, the partner and leader, Indirect Tax at PwC India, the number of exemptions need to be reduced to a bare minimum for sustainable revenue augmentation. “However, most products and services exempt or outside GST were not taxed earlier (before GST) as well. That said, it may be a right time to explore bringing sectors such as health care and education under GST, possibly at a lower rate which will also ensure the seamless flow of credit.”

Commenting on the proposed new slabs, he said that “a 10% and 20% model might simplify the structure but in the current economic environment, it might be difficult for the government to take this step particularly for sectors such as transportation, real estate and food items which are currently in the 5% bracket”.

Some experts are not in favour of any immediate rate change. “At this stage, a change of rates or slabs may not be advisable considering the multiple changes that businesses have undergone in GST. An uptick in the economy is essential to improve collections and alterations in the GST architecture may yield marginal results,” said MS Mani, partner, Deloitte India.