From UPSC perspective, the following things are important :
Prelims level : GST
Mains level : Need for rationalization of GST slabs
The long-awaited rationalization of the multiple rate structure of the Goods and Services Tax (GST) regime is off the table for now and unlikely to materialize in the near future.
What is GST?
- GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
- It is charged at the time of supply and depends on the destination of consumption.
- For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
- GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.
What are GST Slabs?
- In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
- There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
- The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
- The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
- The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.
Issues with GST structure
- Complexity of the GST Structure: The GST structure is quite complex and difficult to understand, which has led to confusion among businesses and consumers alike. This has also led to an increase in the cost of compliance and administration for businesses.
- Heterogeneity of Rates: One of the main issues with the GST structure is the heterogeneity of rates across different goods and services. This has led to an increase in the cost of compliance for businesses as they need to be aware of the applicable GST rate for each product and service.
- Dual GST System: India has a dual GST system, which has led to confusion and complexity for businesses that have to deal with both the central GST (CGST) and the state GST (SGST). This has also led to an increased cost of compliance for businesses.
- Cascading Taxation: The GST structure has led to the problem of cascading taxation, wherein taxes are levied at every stage of the supply chain, leading to an increase in the cost of goods and services.
- Lack of Transparency: The GST structure has led to a lack of transparency in the pricing of goods and services, as the applicable taxes are not clearly indicated in the invoice.
- Poor collection infrastructure: The GST system requires a strong infrastructure in order to function properly, which is not always present in India. This can lead to delays in filing and other issues.
Why rationalize GST slabs?
- Complex duty structure: From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs taxed more than the final product.
- Multiple rate changes: This has been since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
- Stipulated revenue losses: Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.
Benefits of GST rationalization
- Easier compliance: Rationalizing GST slabs helps simplify the tax structure and make it easier for businesses to comply with the law.
- Fairness of taxation: It also helps to ensure that the tax burden is shared fairly and that the revenue generated is used efficiently.
- Efficiency in tax collection: Finally, rationalizing GST slabs leads to more efficient collection of taxes, which helps to reduce the cost of compliance for businesses.
- Rate rationalization is probably the biggest ‘reform’ that is required to make the GST regime more efficient.
- As and when the exercise is complete, it is expected that the GST would be a less complex system that not only would make compliances easier but also boost revenue collection.
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