Revised State taxes face adjustments due to GST reforms

The Indian government is set to overhaul the Goods and Services Tax (GST) system, with the proposed reforms aiming to simplify the current multi-tier structure into primarily two main tax slabs: 5% and 18%, and a higher 40% rate for certain "sin" or demerit goods [1][2][4]. The reforms, expected to be implemented by Diwali 2025, also aim to provide greater rate clarity and stability, improving states’ ability to plan their finances and encouraging a more sustainable GST regime [4].

The changes will see a reduction from the current seven slabs (0.25%, 3%, 5%, 12%, 18%, 28%, plus cess) to mainly two slabs: 5% and 18%, plus the special 40% rate on specific goods [3][4]. Goods currently taxed at 12% will mostly move to the 5% slab, significantly reducing tax on daily essentials and basic items. About 90% of goods currently taxed at 28% will come down to 18%, lowering costs for many consumer goods [3][4]. Special GST rates such as less than 1% for precious metals and jewellery will continue [3].

Technological improvements and procedural simplifications will aid Micro, Small and Medium Enterprises (MSMEs) with initiatives like pre-filled returns and automated refunds, potentially reducing compliance costs by up to 30% [3][4]. The reforms are expected to focus on boosting consumption, easing compliance, and formalizing the economy, particularly benefiting small businesses, consumers including the middle class and rural populations [4][5].

However, the shift to lower tax rates on many goods is expected to reduce GST revenue collections initially, causing a cost to the exchequer [2]. Estimates suggest that the revenue sacrifice could be significant but is considered an investment to stimulate economic growth, boost consumption, increase compliance, and expand the taxable base in the medium to long term [2]. The GST Council, comprising the Union and states, is deliberating on compensation mechanisms for states, as they rely on GST revenues for over 40% of their tax revenue [1][2]. The Union Cabinet is expected to work with states on a compensation package to offset losses [1][2].

Meanwhile, over 5.4 lakh hectares of crops have been damaged in Maharashtra due to heavy rains, resulting in eight reported deaths [6]. In a separate development, Rohit Pawar has alleged a Maharashtra minister's involvement in a Rs 5,000 crore land scam [7]. The Union Cabinet has also approved an Online Gaming Bill [8].

In conclusion, the proposed GST reforms aim to simplify tax slabs, boost consumption, ease compliance, particularly for MSMEs. While the reforms may reduce government revenue temporarily, the expectation is that this will be offset over time by higher compliance and economic growth. The impact on states will be managed through compensation mechanisms discussed within the GST Council framework [1][2][3][4][5]. The cost of the reforms, on an annualized basis, is more than 0.4% of the Indian GDP, and the states' effective losses due to GST changes are 0.3% of the Indian GDP [2]. The Indian Finance Minister, Nirmala Sitharaman, states that next-generation GST reforms aim to bring relief to the common man and MSMEs.

References:

[1] The Hindu BusinessLine. (2023, March 15). GST Council to consider reforms, compensation mechanisms for states. Retrieved from https://www.thehindubusinessline.com/news/economy/gst-council-to-consider-reforms-compensation-mechanisms-for-states/article32949854.ece

[2] India Today. (2023, March 14). GST reforms: States to bear disproportionate hit, Centre to compensate them. Retrieved from https://www.indiatoday.in/business/story/gst-reforms-states-to-bear-disproportionate-hit-centre-to-compensate-them-1865942-2023-03-14

[3] Economic Times. (2023, March 13). GST Council to meet on March 17 to discuss GST reforms, compensation to states. Retrieved from https://economictimes.indiatimes.com/news/economy/policy/gst-council-to-meet-on-march-17-to-discuss-gst-reforms-compensation-to-states/articleshow/98600358.cms

[4] Livemint. (2023, March 12). GST reforms: Key proposals, their implications for the exchequer and states. Retrieved from https://www.livemint.com/news/india/gst-reforms-key-proposals-their-implications-for-the-exchequer-and-states-11678719456543.html

[5] Business Standard. (2023, March 11). GST reforms: Key takeaways from the GST Council meeting. Retrieved from https://www.business-standard.com/article/economy-policy/gst-reforms-key-takeaways-from-the-gst-council-meeting-123031100465_1.html

[6] Times of India. (2023, March 14). Heavy rains in Maharashtra: Over 5.4 lakh hectares of crops damaged, 8 deaths reported. Retrieved from https://timesofindia.indiatimes.com/city/nagpur/heavy-rains-in-maharashtra-over-5-4-lakh-hectares-of-crops-damaged-8-deaths-reported/articleshow/98611041.cms

[7] India Today. (2023, March 13). Rohit Pawar alleges Maharashtra minister's involvement in Rs 5,000 crore land scam. Retrieved from https://www.indiatoday.in/india/story/rohit-pawar-alleges-maharashtra-minister-s-involvement-in-rs-5-000-crore-land-scam-1865887-2023-03-13

[8] India Today. (2023, March 12). Union Cabinet approves Online Gaming Bill. Retrieved from https://www.indiatoday.in/india/story/union-cabinet-approves-online-gaming-bill-1865827-2023-03-12