ALSO READExperts moot ‘sin tax’ of 40% on demerit goods
Govt’s projection vs expert estimates
However, the actual revenue loss, the sources expect to be even lower. The revenue loss will be short-lived, as the rate cut-induced rise in economic activity and improved compliance will mitigate the losses within six months, the sources said. After GST was rolled out from July 2017, there have been tax cuts on hundreds of items, yet the revenues have grown on an annualised basis by over 18% in the four years through FY25. Of course, this was partly due to the low base of initial years, including the Covid period.
The indirect tax rate cut, combined with the income tax cut unveiled in the budget for 2025-26 could catalyse consumption, the sources said.
However, independent experts reckon the revenue loss to be higher. Acknowledging that many of the details on the new GST rates are not yet known, Pranjul Bhandari, Chief India and Indonesia Economist at HSBC, along with her two colleagues predicted a possible scenario where the cost to the exchequer will be around $16 billion (Rs 1.43 lakh crore) or 0.4% of the GDP. The revenue loss could be equally split between the central and state governments. They estimate that as some products are moved to lower tax buckets – from the 12% to the 5% bin, and from the 28% to the 18% bin, a minority may be pushed up from the 12% to 18% or from 28% to 40% too.
Key changes under discussion
The lower revenue loss estimate by the government also takes into account the fact that for 99% of items moving from 12% rate to 5%, the input tax credit (ITC) will unlikely be available. Also, online gaming, which is taxed at 28%, will likely see a 12 percentage point increase in tax rate to 40%.
A group of ministers on GST rate rationalisation, headed by Bihar deputy chief minister Samrat Choudhary, would meet here on Wednesday-Thursday to firm up the GST refiorms in the coming weeks, so as to make it convenient for the GST Council to meet in September-October (much before Diwali on October 20) to take the decision.
ALSO READPM chairs meet with CCEA, Niti Aayog, ministers for 100-day plan
Going by the Centre’s formula, both the 28% tax bracket and the cess, which will outlive its utility by November, will be done away with. The 12% rate which covers barely 5% of the items, will also go.
As a result, the weighted average GST rate may fall further from the current level of around 11%. Though there could be a short-term dip in tax buoyancy, this would be “managable,” a senior official told FE earlier.