Introduction
In recent discussions under the Goods and Services Tax (GST) Council, three Groups of Ministers (GoMs) have suggested a number of modifications aimed at optimizing the tax regime. These proposals include tweaking tax rates, merging the compensation cess with the highest tax slab, and introducing exemptions for lower health insurance covers. However, the approach seems fragmented, highlighting the need for a holistic, well-researched restructuring of GST.
Current State of GST: Structural Concerns
The GoM on Rate Rationalisation (GoM-RR), which is tasked with restructuring GST to streamline tax slabs, seems reluctant to undertake a comprehensive overhaul, despite the pressing November-end deadline. Instead, the GoM has recommended rate changes for over 100 items, focusing on imposing higher differential taxes on luxury goods like expensive watches and shoes. While this may seem like a step forward, it barely scratches the surface of the systemic issues inherent in the current GST framework.
The real need at this stage is a thorough analysis of GST’s revenue performance over the last seven years, devoid of external influences like the pandemic. For instance, pre-GST taxes yielded higher collections relative to GDP compared to current GST revenues. According to estimates, GST collections excluding cess proceeds are stagnating at around 5.6% of GDP—a figure that falls short of the pre-GST period. A deeper examination of this data is critical for making informed decisions.
Issues with Rate Stability and Governance
Originally, the GST Council worked with a cohesive and economic focus, but recent decisions seem driven by short-term political motives rather than long-term economic stability. Frequent changes in GST rates and exemptions have eroded the perceived stability of the GST regime. Unlike the older excise, service tax, and VAT systems, the present GST structure has undergone numerous alterations, raising concerns about its reliability and consistency.
There has been much talk about the average GST rate falling well below the revenue-neutral rate (RNR) of 15-15.5%, as calculated during GST’s inception. However, aiming to align with this RNR may be misleading, especially since these calculations assumed significantly fewer exemptions than what is currently in place. This inconsistency has further muddied the GST structure, rendering it less efficient than intended.
Broader Tax Base and Rate Restructuring
To fulfill the original vision of GST as a robust destination-based indirect tax on consumption, the GST Council must undertake key reforms. This includes reducing the number of main GST slabs from four to two, supplemented by a special rate for luxury and demerit goods. A rational restructuring could potentially bring the weighted average rate to around 10%, with differentiated slabs such as an 8% merit rate and a 12% standard rate, making it less burdensome for taxpayers.
Exemptions should be limited primarily to essential goods, such as unbranded food and farm produce, to ensure a broad tax base. A broader base would enable effective input-output cross-matching, one of the foundational principles of GST, improving both transparency and compliance. The continuation of the compensation cess beyond March 2026 should be evaluated after assessing the revenue potential of a revamped GST regime.
Conclusion
The GST Council’s role is pivotal in realizing the economic, productivity, and revenue benefits that a comprehensive destination-based indirect tax promises. Rather than piecemeal modifications that cater to short-term revenue or political motives, a well-researched, consistent approach that minimizes exemptions and restructures the rate slabs is crucial. Only through systematic reform can GST fulfill its potential as a simplified, efficient tax system that balances revenue needs with fairness and stability.