Among other things, the GST cuts announced on Friday are expected to make eating out cheaper. (TOI file photo ... Read More

NEW DELHI: The Centre and the states have been debating changes in goods and services tax ( GST ) rates, especially in the top bracket, but it was a surplus earned during August that appears to have finally given both the confidence to move ahead and slash rates on over 175 products in the top slab.

Sources told TOI that the states were staring at a shortfall of Rs 17,000 crore in July. By August, however, the deficit had came down to Rs 7,000 crore and factoring in collections of nearly Rs 8,000 crore from the compensation cess levied on automobiles, aerated drinks and tobacco gave ministers the space and confidence to go ahead.

While ministers that TOI spoke to said it was premature to talk about the next round of change, the road map is clear. The list of 50 items in the top bracket is expected to be pruned further in the coming months.

More importantly, although finance minister Arun Jaitley refrained on Friday from commenting on it, most states see a quicker-than-expected transition to a three-tier slab.

Sources said that during the GST Council meeting in Guwahati, some of the states argued for moving to a two-rate GST over a period of time as they saw it as a cleaner and easier way to implement the tax system.

When GST was first conceived, the plan was to have one rate or, at best, two. But political factors compelled the government to settle for four, an issue that has come under criticism from the opposition and experts.

Sources who spoke to TOI, however, desisted from making any prediction about when a two-rate scheme could become a reality, saying the proposal was still at the "discussion stage", and it will be a while before concrete steps towards collapsing the scheme into two rates are taken.

For the moment, the next round of reforms in the GST rate structure will focus on pruning the 18 per cent list and then gradually converging the two standard rates of 12 per cent and 18 per cent.

The conservatism is borne out by the caution the Centre is exercising for fear of decline in revenues. The wariness was the reason the decision on pruning the list for the top bracket was delayed until the Guwahati meeting. The Centre appeared reluctant to slash the 28 per cent list drastically until pressure from BJP to keep fewer items in the top bracket and a better-than-expected revenue situation led it to take the plunge.

The finance minister of a BJP-led state acknowledged that higher tax rates had created an image problem for GST, creating what he called a wrong perception about the new tax scheme making things dearer for the consumer. "Optically, it appeared that the tax rate is too high, when the reality is that with VAT and service tax the incidence was higher for several products," said the minister.

With the opposition seeking to weaponise GST during the Gujarat elections, the government decided to go ahead with the change although the expected revenue hit mounted from around Rs 16,000 crore (if the list was pruned to 62 items) to Rs 20,000 crore.

