GST reforms in India: Kerala raises concerns over possible luxury goods tax reduction

Thiruvananthapuram: With structural changes in the Goods and Services Tax (GST) underway, indications suggest that luxury goods might see a reduction in tax rates. If this materialises, it could remarkably impact Kerala’s tax revenue. There are also reports that the tax on lottery tickets may be raised to as much as 40%.

At present, there are four GST slabs – 5%, 12%, 18% and 28%. The Central Government has decided to reduce these to two rates. However, the final decision rests with the GST Council. Initial reports suggest that expensive mobile phones and high-end electronic products could see a reduction in GST. This would adversely affect consumer states like Kerala.

How will Kerala assess the potential revenue impact?

A tax increase of up to 40% is under consideration for lotteries, which raises concerns about serious economic impact. The state government has tasked the State GST Department with studying how the proposed changes in the tax structure would affect Kerala’s revenue.

Kerala’s Finance Minister K N Balagopal is a member of the six-member ministerial committee formed to assess the restructuring. The committee is scheduled to meet in New Delhi on August 20 and 21.

Will consumers actually benefit from lower GST rates?

A reduction in tax rates will impact states’ revenues. However, there is no compulsion to lower the prices of products accordingly. In the past, when GST rates were reduced, traders reaped the benefits without passing them on to consumers, as Kerala's own study has shown. States insist that such situations must be avoided this time.

Currently, the GST on lotteries is 28%. If raised to 40%, prices will need to be increased further.

When GST was implemented, the revenue-neutral tax rate was estimated at an average of 15.8%. After the rate restructuring in 2018, this dropped to 11.3%, which affected the states. The goal was to achieve a 14% annual growth in tax revenue after GST implementation. States that failed to meet this target were given compensation for the first five years.

However, Kerala’s tax revenue growth has not exceeded 12%. Former Finance Minister Dr Thomas Isaac has stated that if rate reductions lead to revenue losses, states should be compensated accordingly.