NEW DELHI: An increase in goods and services tax (GST) on several items and a special levy of 35% on “sin goods” like cigarettes, as proposed by a group of ministers (GoM) formed by the GST Council, are expected to help partially offset revenue shortfalls due to abolition of the tax on insurance premiums, experts say.
According to sources, the GoM has estimated that the rejig of rates for 148 items is likely to result in an additional revenue of about Rs 22,000 crore every year for the Centre and states. This would, to some extent, offset the loss due to removal of GST on health and life insurance premiums.
However, a revenue neutral rate (RNR) through rate rationalisation measures – as being talked about – is unlikely to be achieved anytime soon, they say.
Krishan Arora, partner, Grant Thornton Bharat, said the GoM’s proposal appears to be aimed at compensating for potential revenue shortfalls from reduced rates on common-use items and exemptions to health and life insurance premiums. “By rationalising rates, the GoM’s strategy appears to seek a revenue-neutral position,” he said.
The GoM on rate rationalisation, a six-member panel, has finalised its recommendations for rate changes for about 150 items. According to sources, it has suggested a 35% special GST on tobacco, tobacco products and aerated beverages. It has also suggested increasing tax rates on ready-made garments, luxury watches and shoes, and cutting rates on packaged water, stationary items, etc.
Another GoM has decided to recommend the GST Council to exempt premiums paid for term life insurance and health insurance by senior citizens from the ambit of the tax regime. It has proposed to exempt health insurance policies with coverage up to Rs 5 lakh from GST.
In FY24, the total revenue collected from GST on health and life insurance premiums was Rs 16,398 crore, and on re-insurance premiums Rs 2,045 crore. In the past five financial years, the total revenue collected by the Centre and states from these products was around Rs 52,000 crore.
Rajat Bose, partner, Shardul Amarchand Mangaldas & Co, said the proposed reduction in GST rates in health and life insurance sectors may be compensated by an increase in the rate for sin goods. “But any increase in rates will need to be evaluated from the perspective of the impact it is likely to have on the industries which will be impacted,” he said.
Bipin Sapra, tax partner, EY India, said that an effective and simplified tax structure, even though not tax neutral in the short run, will bring tax buoyancy which will in turn align with the overall objective revenue neutrality. “However, any reduction in insurance rate may not find a one-to-one correlation in rate changes in other items to compensate for the revenue loss,” he said.
In an interview to FE earlier, Central Board of Indirect Taxes (CBIC) chairman Sanjay Kumar Agarwal had said that in the long run the government’s endeavour is to achieve “revenue neutrality” with respect to GST, which means achieving a weighted average rate, under which there is no “major fall” in revenue collections of the government on a sustainable basis.
The RNR during the introduction of GST was determined at 15%, which subsequently reduced to around 11% (by 2019) as GST rates on many products came down, he mentioned. In FY24, the average GST rate was 11.6%, according to the finance ministry. In FY24, the GST revenue collected from the 28% slab was 13-15%, from the 18% slab 70-75%, from the 12% 5-6%, and from the 5% slab was 6-8%.
Niraj Bagri, partner, Dhruva Advisors, said the GoM’s proposition is to levy tax at multiple rates depending upon the price point at which such goods are being sold. “Instead of the current practice of levying the tax at a consistent rate, the new methodology seeks to collect tax at a higher rate from the end user who has the ability to bear the higher rate of tax. This approach would compensate for loss of revenue which could be incurred if other categories of goods and services are being exempted,” she said.
Source: The Financial Express
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