Two-Slab GST Plan May Cut Govt Revenue by ₹85,000 Crore but Boost Consumers’ Spending Power by ₹1.98 Lakh Crore: SBI Report

The proposed plan of two slabs in the Goods and Services Tax (GST) could lead to an annual revenue loss of Rs 85,000 crore for the government. However, it will also boost people's spending power by Rs 1.98 lakh crore. The SBI research report stated that the government is considering a two-rate structure of 5 percent and 18 percent. Additionally, 5-7 selected items, such as pan masala and tobacco, will be taxed at 40 percent.

In this financial year, the revenue deficit is projected to be Rs 45,000 crore, based on the assumption that the new tax rates will be effective from October to March. According to the report, the effective weighted average GST rate has decreased from 14.4 percent at the time of implementation to 11.6 percent in September 2019. With current rate rationalization, the effective weighted average GST rate could fall further to 9.5 percent. Nevertheless, increased consumption is not expected to trigger inflation, as taxes on most consumption items will be reduced under the proposed GST system.

The report indicated that CPI inflation may decrease by 0.20 to 0.25 percent. Since the GST rate on essential commodities like food and clothing is expected to drop from 12 percent to 5 percent, CPI inflation in this category could decrease by 10-15 basis points, considering a 60 percent impact on food items.

When combined with the income tax rate cuts announced in this fiscal year's budget, individuals’ total additional spending capacity could reach Rs 5.31 lakh crore, which is approximately 1.6 percent of GDP. The Center's proposal will be reviewed by a committee of state finance ministers on Wednesday and Thursday. After approval, it will be presented at the next GST Council meeting scheduled for next month.