GST Rates: What if 35% GST is Imposed?

GST rates refer to the percentage of tax imposed on the sale of goods or services under CGST, SGST and IGST Act.

The Group of Ministers (GoM) on rate rationalisation is reported to have suggested implementing a 35% GST rate for demerit goods such as cigarettes, tobacco products, and aerated beverages. The cess component on tobacco products is likely to continue.

This GST hike will be imposed on at least 148 items, including high-end ready-made garments, cosmetics, watches, shoes, and others. However, the GST council will take the final decision on 21st December 2024 in Jaisalmer.

The existing GST structure features four tax slabs: 5 per cent, 12 per cent, 18 per cent, and 28 per cent, with the highest rate of 28 per cent applied to “Luxury products.” A new proposal suggests introducing a 35 per cent GST for “Sin Products,” effectively creating a distinct classification based on the nature of the products. The increase in the GST rate is intended to assist the Centre and the States in compensating for the revenue lost due to rate reductions on other frequently used items.

“The proposed 35% GST slab on tobacco products and aerated beverages, coupled with an additional compensation cess, will significantly increase the tax burden on these items. This positions tobacco and aerated drinks among the most heavily taxed consumer goods under the current tax regime. While economic theory suggests that higher taxes may reduce consumer demand, the demand for these products, driven by addiction, is generally inelastic”, an expert said.

He also added “The higher taxation is likely to impact demand negatively. However, the impact on long-term demand is likely to be affected considering the nature and consumption of the aforesaid products. “Even with potential short-term reductions in consumption, long-term demand is unlikely to decrease substantially. Their packaging and marketing strategy is likely to remain largely unaffected.”

Industry Concerns

Unjust Competition

A 35% GST would considerably increase production and distribution costs for impacted industries. This rise in expenses could diminish profit margins, lower competitiveness, and potentially result in job losses.

Interruption of Supply Chains

The implementation of higher taxes may disrupt current supply chains, as companies might have to modify their operations to accommodate increased expenses. This could result in delays, inefficiencies, and elevated prices for consumers.

Effect on Consumer Demand

Increased prices resulting from the 35% GST may suppress consumer demand, especially for luxury and non-essential items. This could adversely affect businesses in these areas, resulting in lower sales and revenue.

Higher Expenses and Diminished Competitiveness

A 35% GST would considerably increase production and distribution costs for impacted industries. This rise could squeeze profit margins, diminish competitiveness, and possibly result in job losses.

Economic Impacts

Inflationary Pressure

Increasing taxes on goods can lead to inflation, as businesses might transfer the extra costs to consumers. This could diminish consumer purchasing power and negatively impact overall economic growth.

Social and Health Implications

An increased GST could have a greater impact on lower-income households, as they allocate a larger share of their income to essential goods and services that might be taxed at an elevated rate.

Impact on Investment

Heightened uncertainty and elevated costs linked to a 35% GST could deter investment, which may, in turn, impact job creation and hinder economic growth.

Measures that can be taken to reduce the tax burden

Gradually implementing policies

Instead of a sudden hike in GST rates, the government can incrementally increase and ease the transition which will be helpful for industries and consumers.

Exemptions

GST rates for essential goods and services can also be reduced to minimise the regressive impact.

Support for Small & Medium Scale Industries

Financial assistance, reduced-interest loans and subsidies. Focussing on core products or services, shifting to digital tools for more efficiency.

In conclusion, while a 35% Goods and Services Tax (GST) could significantly boost government revenues, its potential adverse effects on businesses and the broader economy cannot be overlooked.

A higher tax rate might lead to increased consumer costs, reduced disposable income, and possible declines in business investments, particularly in industries with thin profit margins.

Therefore, policymakers must balance generating necessary revenue and preserving a healthy business environment. Careful design of the tax structure, along with safeguards to protect businesses and consumers, is essential to ensure long-term, sustainable economic growth.

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