Background: GST Basics
- GST (Goods and Services Tax) introduced in July 2017 as India’s biggest tax reform.
- Aim: Replace multiple indirect taxes (VAT, excise, service tax, etc.) with a “One Nation, One Tax” system.
- GST currently has a multi-slab structure:
- 0% (essential items, food grains)
- 5% (mass consumption items)
- 12%
- 18% (major slab, covers bulk of goods/services)
- 28% (luxury & sin goods, plus additional cess on items like tobacco, aerated drinks, luxury cars).
Relevance : GS 3(Taxation), GS 2(Governance)
The Current Proposal
- Centre’s idea: Simplify GST by removing 12% & 28% slabs → creating a two-rate structure (likely 5% and 18%).
- GoM (Group of Ministers) on Rate Rationalisation, headed by Bihar Dy CM Samrat Choudhary, has:
- Approved the Centre’s proposal.
- Forwarded recommendation to the GST Council.
- Next step: GST Council (headed by Union Finance Minister + state FMs) will decide.
Why Two-Rate GST? (Rationale from Basics)
- Simplification: Current 5-slab system is complex, leads to disputes & classification issues.
- Ease of compliance: Businesses, especially MSMEs, face confusion on rates → simplified GST eases compliance.
- Transparency: Fewer slabs → less lobbying & manipulation for favorable tax rates.
- International practice: Most countries with VAT/GST have 1–2 standard rates. India’s current system is an exception.
Concerns Highlighted
- Revenue Loss for States:
- States fear loss of income if higher slab (28%) is removed.
- Kerala FM K.N. Balagopal (GoM member) warned that States must be compensated for revenue shortfall.
- Luxury & sin goods:
- Currently taxed at 28% + cess.
- If merged into 18%, revenue may fall and demand may rise (making luxury more affordable).
- Equity concern:
- A flatter structure risks taxing rich and poor more equally (less progressivity).
Implications of Reform
- For Consumers:
- Everyday goods may see minor changes depending on reclassification.
- Luxury goods may become cheaper if 28% slab is scrapped without cess adjustment.
- For Businesses:
- Easier invoicing, accounting, fewer classification disputes.
- Encourages formalization of MSMEs.
- For Government:
- Simplification = better compliance, less litigation.
- But must balance revenue neutrality vs consumer affordability.
Larger Economic Context
- India is eyeing GST 2.0 reforms as:
- Compensation cess regime (to cover State revenue losses) ended in June 2022.
- GST collections now averaging ₹1.6–1.7 lakh crore/month → suggesting revenue stability.
- With economy stabilizing, reform window has opened.
- This is part of long-term plan: eventually move to “three-rate GST” (0% for essentials, one standard rate, one higher rate for sin goods).
Challenges Ahead
- Political consensus in GST Council:
- Requires support of majority of States.
- Rich vs poor states have divergent priorities.
- Compensation demand: States like Kerala, Punjab may insist on guaranteed compensation formula.
- Inflation risk: If restructuring raises rates on mass consumption items, it could trigger inflationary pressure.
Way Forward
- Create a Revenue-Neutral Rate (RNR) to ensure States do not lose income.
- Retain a sin/luxury cess outside main GST slabs to discourage harmful consumption.
- Use technology (AI-driven GSTN analytics) to improve tax compliance → reduce need for higher slabs.
- Gradual implementation → start with merging 12% into 18%, then carefully deal with 28%.
