From UPSC perspective, the following things are important :
Prelims level : GST slabs, Inverted Duty Structure
Mains level : Read the attached story
The GST regime is due for an overhaul in tax rates levied on different products because of structural anomalies and to reduce the multiple tax slabs.
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.
Why rationalize GST slabs?
- 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 are taxed more than the final product.
- These are far too many rates and do not necessarily constitute a Good and Simple Tax.
- Multiple rate changes 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%.
- Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.
Haven’t GST revenues been hitting new records?
- Yes, they have – GST revenues have scaled fresh highs in three of the first four months of 2022, going past ₹1.67 lakh crore in April.
- But there is another key factor — the runaway pace of inflation.
- Wholesale price inflation, which captures producers’ costs, has been over 10% for over a year and peaked at 15.1% in April.
- Inflation faced by consumers on the ground has spiked to a near-eight year high of 7.8% in April.
- The rise in prices was the single most important factor for higher tax inflows along with higher imports.
Can we expect the rate reset this year?
- Any re-arrangement of GST rates will entail some products being taxed higher, with concomitant ripple effects on prices.
- The Centre and the States are not unmindful of the desperate need to rationalise the rate slabs and structure but we just need to get the timing right.
- Presently inflation is the top worry.
- With inflation, much of it imported through pricier fuels, commodities and food items, expected to hover high through the year, the GST rate reset hopes appear bleak in 2022-23.