Why the GST Council Struggles to Deliver Big-Ticket Reforms
India’s Goods and Services Tax (GST) system, introduced in 2017, was hailed as a game-changer for simplifying taxation and boosting revenue. Yet, despite consistent growth in GST collections, major reforms remain elusive. In this article, we explore the key challenges hindering the GST Council from implementing the big-ticket reforms India urgently needs.
The Paradox of Rising GST Collections
According to the Ministry of Finance, total GST revenue surged from ₹11.37 lakh crore in 2020-21 to ₹20.18 lakh crore in 2023-24, with the average monthly collection jumping from ₹0.95 lakh crore to ₹1.68 lakh crore.
However, this increase masks underlying issues:
- Economic Slowdown: India’s GDP growth dipped to 5.4% in Q2 FY2023-24, with private consumption falling from 58.1% in FY2021-22 to 55.8% in FY2023-24.
- Consumer Spending Concerns: Experts, such as Manish Dubey of CorpAcumen Advisors, caution that higher tax rates could suppress consumer spending, exacerbating the slowdown.
The rise in collections stems more from curbing tax evasion and expanding the taxpayer base than from increased economic activity.
The Need for Rate Rationalisation
The GST system currently features multiple tax slabs: 5%, 12%, 18%, and 28%, along with special rates for items like gold. Simplifying this structure is vital for reducing disputes and boosting compliance.
Finance Minister Nirmala Sitharaman highlighted a significant drop in the average GST rate to 12.2% in 2023, far below the revenue-neutral rate (RNR) of 15.3%. While this benefits consumers, it creates a revenue shortfall for the government.
To address this, experts recommend:
- Reducing Slabs: Grouping commodities under fewer tax categories.
- Efficient Tools: Leveraging AI and data analytics to improve collection efficiency.
Balancing Federalism and Revenue
GST reform requires navigating the delicate balance of federalism. States rely on excluded items like alcohol and petroleum for revenue, making them cautious about reforms that could erode their income.
Former Revenue Secretary Sanjay Malhotra noted the dual challenges of revenue neutrality and state acceptance:
- State Concerns: Revenue loss fears hinder consensus on rate changes.
- Federal Coordination: Any GST revision affects state budgets, demanding careful negotiations
Relief Measures in the Pipeline
The upcoming GST Council meeting in Jaisalmer is expected to bring relief on certain health and life insurance premiums. Currently taxed at 18%, policies with premiums up to ₹5 lakh may soon be exempt, benefiting middle-income groups and senior citizens.
Such targeted exemptions aim to ease the tax burden while addressing broader economic challenges.
The Way Forward
While relief measures are steps in the right direction, experts argue that transformative reforms require bold action:
- Simplified Tax Structure: Reduce slabs to streamline compliance.
- Enhanced Efficiency: Use advanced technologies to maximise collection without rate hikes.
- Inclusion of Exempted Items: Gradually bring items like fuel under GST for a unified tax regime.
Key Takeaways
- GST collections are rising, but this reflects better compliance, not economic growth.
- Rationalising tax slabs and enhancing efficiency are critical for sustainable revenue.
- Federalism complicates reforms, requiring a balanced approach to state and central needs.
- Targeted relief on insurance premiums signals progress but falls short of the big-ticket reforms India needs.