Goods and Services Tax (GST)

Next government must urgently fix ‘unnecessarily complex’, counter-productive GST: 13th Finance Commission chair


From UPSC perspective, the following things are important :

Prelims level: Taxation; GST;

Mains level: Recent Issues in Taxation;

Why in the news? 

Recently Vijay Kelkar (chaired 13th Finance Commission) attributes frauds in Indirect Tax regimes to high GST rates; Moots switched to a single 12% rate like most other countries.

Reason behind the need for a Single GST rate:

  • Simplification of the structure: A single GST rate would simplify the structure, making it easier for businesses to comply with the tax system and reducing the complexity of classification issues
  • Promotion of manufacturing and exports: A single GST rate could help promote manufacturing and exports by reducing the burden of multiple rates and making the tax system more predictable
  • Single GST rate in many countries: In many developed and emerging market economies, a single GST or VAT rate has been successful in optimizing tax revenue and minimizing tax disputes for example Singapore, New Zealand, the United Arab Emirates, and Japan, have opted for a single GST or VAT rate
  • Addressing GST frauds: High GST rates can make it lucrative for fraudsters to evade taxes. A single, lower GST rate could potentially reduce the incentive for tax evasion and make the system more transparent
  • Reducing litigation: A single GST rate could help reduce litigation related to classification issues and subjective interpretation of tax rates

How does the Indian GST model compare with GST in other countries?

Particulars India  Canada UK Singapore
Name of GST in the Country Goods and Service tax Federal Goods and Service Tax & Harmonized Sales Tax Value Added Tax Goods and Service Tax
Standard Rate 0% (for food staples), 5%, 12%, 18% and 28% (+cess on luxury items) GST 5% and HST varies from 0% to 15% 20 %Reduced rates- 5 %, exempt, zero rated 7% Reduced rates- Zero rated, exempt
Threeshold Exemption Limit Rs.40 lakh or Rs.20 lakh, depending on the state and supply Canadian $ 30,000 £ 85,000 Singapore $ 1 million
Liability arises on Accrual basis: Issue of invoice ORReceipt of payment-earlier Accrual basis: The date of issue of invoice OR the date of receiptof payment- earlier. Accrual Basis: Invoice OR PaymentOR Supply-earliestCash basis (T/O up to 1.35mn): Payment Accrual Basis: Issue of invoice OR Receipt of payment OR Supply – earliestCash basis: (T/O up to SGD$1mn): Payment
Reverse Charge Mechanism Applies on goods as well as services Reverse charge applies to the importation of services andintangible properties Applicable Reverse charge applies to the supply of services
Exempt Supplies Sale of land and completed buildings, certain healthcare and educational services, essential food items, etc. Real estate, financial services, rent (Residence), charities, health, education Medical, education, finance, insurance, postal services Real estate, Financial services, Residential rental

Significance of sharing GST with local bodies:

  • Promoting Co-operative Fiscal-federalism: Sharing GST revenues with local bodies could promote fiscal federalism by ensuring a fair distribution of tax revenues among all tiers of government.
  • Strengthening of their Fiscal base: Equitable sharing of GST with the third tier of government, i.e., local bodies, would strengthen their fiscal base and enable them to undertake investments for vital infrastructure and high-quality public goods
  • Building Fairness and appropriateness: GST is a consumption tax, and taxpayers should see direct benefits accruing from their payment of taxes. An arrangement for sharing GST revenues with local bodies would be fair and appropriate
  • Improves Local governance: Sharing GST revenues with local bodies would bolster the quality of governance provided by local governments, as citizens’ demand for quality public goods will grow louder.


About Goods and Services Tax:

  • GST was introduced through the 101st Constitution Amendment Act, 2016. It is one of the biggest indirect tax reforms in the country.
  • It was introduced with the slogan of ‘One Nation One Tax’.The GST has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
  • It is essentially a consumption tax and is levied at the final consumption point.
  • Tax Structure:
  • Central GST to cover Excise duty, Service tax etc, State GST to cover VAT, luxury tax etc. and Integrated GST (IGST) to cover inter-state trade.
  • IGST per se is not a tax but a system to coordinate state and union taxes.
  • It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.

Conclusion: Implementing a single GST rate streamlines compliance, promotes economic growth, and curbs fraud. Sharing GST revenue with local bodies strengthens fiscal bases, fosters fairness, enhances governance, and supports fiscal federalism for equitable distribution.

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