Proposed 2-tier GST structure could lower effective tax rate, boost revenues in long term: S&P;

New Delhi: The proposed 2-tier GST structure could lower effective taxation rate and boost fiscal revenues over the longer term, S&P Global Ratings Director YeeFarn Phua said on Tuesday.

His comments come ahead of a crucial meeting of the Centre and states on Wednesday and Thursday to discuss GST reform proposal by the Centre.

The central government has proposed reforms in the Goods and Services Tax (GST) regime wherein slabs would be reduced to just two -- 5 and 18 per cent-- and a special tax rate of 40 per cent on select few items.

Currently, there are 4 slabs under GST -- 5, 12, 18 and 28 per cent and the taxation system has been an important component of the government's revenues.

Replying to a question on the impact of GST rate rejig on revenues, Phua said the current GST regime is complex with four different rates which makes accounting, and implementation quite difficult sometimes.

"With the proposed 2-rate system being looked at, though the effective rate could be somewhat lower, because of easier implementation and accounting process, there could be a boost to fiscal revenues over longer term," Phua said at a webinar.

Stating that the proposal is being deliberated both at the Centre and state levels, Phua said the reforms in the GST system are unlikely to hit fiscal revenues.

"Overall, we don't think it would be a major drag on fiscal revenue. With lower rates and clearer implementation, it is possible to boost consumption spending in short-term as well. That is something we are watching out for," Phua said.

As per the Centre's proposal, 99 per cent of the items in current 12 per cent slab will be brought down to 5 per cent, while 90 per cent of the items in 28 per cent slab will be bracketed at 18 per cent.

The changes will reduce classification disputes, scope for litigation and evasion as well as remove duty inversion.