Potential implications of GST rate rationalisation

The proposed increase of the GST rate to 35% on certain “sin goods” has sparked considerable debate. The Group of Ministers (GoM) on GST rate rationalisation suggests raising the tax on products such as aerated beverages, cigarettes, and tobacco from 28% to 35%. This move, if implemented by the GST Council, could lead to significant fiscal and public health implications.

Firstly, the rationale behind this proposed increase is twofold: to enhance government revenue and to promote public health. Sin goods are classified as demerit products due to their harmful effects on health. By imposing a higher tax rate, the government aims to discourage the consumption of these products. This aligns with global trends where higher taxes on such items are used to curb their usage due to associated health risks.

From a fiscal perspective, the increased GST rate is expected to generate substantial revenue. Products like tobacco and sugary drinks typically exhibit inelastic demand, meaning that consumption remains relatively stable despite price increases. This ensures a steady revenue stream, which could reduce reliance on the compensation cess originally designed to offset states’ revenue losses post-GST implementation.

Moreover, the proposed rate increase is a significant public health intervention. Higher taxes on tobacco and sugary drinks aim to reduce their consumption, especially among price-sensitive consumers, thus promoting healthier alternatives. The government hopes this measure will help tackle lifestyle diseases such as cancer, diabetes, and obesity.

However, the Finance Minister has clarified that the GoM’s recommendations are premature and speculative. As the GoM is a recommendatory body, the final decision rests with the GST Council. Clear and timely communication from the government will be crucial for a seamless transition if the new rate is implemented.

In conclusion, the proposed 35% GST rate on sin goods represents a strategic effort to boost revenue and improve public health. The decision, however, hinges on the GST Council’s approval and the government’s ability to manage the transition effectively.