India may finally overhaul the GST regime seven years after its inception, as it looks to simplify the system without increasing prices of essential goods. The fitment panel under the Goods and Services Tax Council is considering two options to replace the current four-slab rate structure as part of GST rationalisation. The government is exploring two potential rate structures: 8%, 16%, and 24% slabs or 9%, 18%, and 27% slabs. The goal is to ensure essentials do not become costlier, while luxury goods, often referred to as ‘sin goods’, may be subject to different treatment.
After the fitment panel submits its proposals, a group of ministers will present a final report to the GST Council which is expected to meet between August 21 and August 23.
Merging tax slabs is a potential solution to simplify the GST structure, but it is a complex issue. The government faces the challenge of maintaining revenue neutrality. A study by the RBI revealed a significant drop in the weighted average GST rate from 14.4% in 2017 to 11.6% in 2019, which is below the estimated revenue-neutral rate of 15.3%. Any changes to the tax structure must carefully consider this factor to avoid revenue losses. Simplifying the GST rate structure is a key goal to improve the ease of doing business. While merging the current tax slabs into fewer options, such as 8% and 15%, may be an option, concerns about potential inflation must be carefully considered.
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Need for GST rationalisation
The GST regime currently has four tax slabs with standard rates of 5%, 12%, 18%, and a top rate of 28%. This financial year, the GST regime is expected to transition from a four-slab structure to a three-slab one. In her Budget speech on July 23, FM Sitharaman emphasised the necessity of GST rate rationalisation, highlighting its critical importance.
While the Goods and Services Tax is one of the most significant reforms of the last decade, it has not unlocked its full potential for various reasons. Its performance has been underwhelming compared to initial expectations, and the economy has not benefited as envisaged. Despite a rise in tax collections, the government needs to maximise GST’s impact by prioritising reforms such as simplifying tax rates, improving administration, and expanding the tax base. Incidentally, revenues from the Goods and Services Tax hit a record high of Rs 2.1 lakh crore in April, which typically sees higher inflows due to a year-end compliance rush.
The government has been looking to reform the GST to make it a truly Good and Simple Tax as originally envisioned. GST 2.0 must not only focus on boosting tax revenues but also enhance the overall indirect tax system.
A GST reform wishlist
One major call from individuals is for clarifications related to, and reviews of, past decisions such as the 28% levy on online games and casinos. Rectifying the inverted duty structure affecting sectors like textiles, footwear, medicines, and fertilisers, which hinders input tax credit claims, is also essential. The government must review the high tax rates on essential items such as two-wheelers.
Reviving the plan to rationalise GST’s complex, multiple-rate structure is already under consideration. The new rate structure must ensure lower levies on items such as cement and insurance.
Analysts have called for a roadmap to bring essential items like electricity, natural gas, and petroleum products under the GST umbrella to create a seamless input tax credit chain. However, this will be challenging as both the Centre and the states get a sizable portion of their revenues from petroleum taxes, and states levy their own taxes, exercising a degree of control.
Simplifying compliance, especially for small businesses, as promised in the BJP manifesto, is much needed. Large corporations have repeatedly complained about facing multiple registrations and varying rules; the government must streamline this.
In the past, the GST Council has not shied away from correcting genuine anomalies in the tax regime. However, implementing more significant reforms, such as rationalising tax rates and expanding the GST base, will be a complex challenge. Political considerations and the need to balance the interests of different states may hinder progress in these areas. The government and policymakers should be guided by a simple agenda: overall, the Goods and Services Tax must smoothen matters instead of complicating them.