We should split GST revenues 60:40 in favour of states

This is justified by their larger fiscal burden and can solidify the spirit of cooperative federalism

- AJIT RANADE

The decisions taken at the 56th meeting of the Goods and Services Tax (GST) Council were historic and can justifiably be called the launch of GST 2.0.

After seven years of its rollout, a major overhaul has been undertaken to reform this levy on consumption. The regime's four major tax slabs will be collapsed into two from 22 September and a new slab rate will be introduced as a penal rate for super-luxury goods and 'sin' items like tobacco.

The earlier multiplicity of tax rates had militated against the spirit of a "good and simple" tax right from its rollout stage. So, the shift to just two rates is a very welcome reform.

The 12% and 28% rates have been eliminated and the 5% and 18% rates have been retained.

As such, the 18% rate was already garnering two-thirds of all GST revenue, and only 7% of the mop-up was coming from the 5% slab, with the other two slabs of 12% and 28% accounting for 5% and 11% of the total.

The 18% slab will now collect an even greater share of GST revenue.

The simplification into two rates was, however, done in an asymmetric way.

Most of the 12% category items were moved to 5%, and most of the 28% items moved to 18%.

Very few items moved in the reverse direction to a higher tax rate.

This implies that the overall tax burden or the effective tax rate of this levy will get lowered.

It is thus a fiscal boost for consumption spending.

Whether this was partly necessitated by the steep tariffs imposed by US President Donald Trump is unclear.