The Goods and Services Tax (GST) system in India has been under the microscope recently, as three groups of ministers (GoMs) under the GST Council met to recommend a series of rate tweaks and exemptions. These discussions included proposals for lower health insurance exemptions and merging the “compensation cess” with the highest tax slab at a future date. The GoM on Rate Rationalisation (GoM-RR), tasked with a comprehensive overhaul of GST slabs, seemed hesitant to take any drastic restructuring actions, despite a looming November deadline.
This indecision leaves many taxpayers questioning whether the current approach to GST rate revision is genuinely beneficial. Instead of comprehensive restructuring, the GoM opted for incremental changes, such as applying higher taxes on high-value items like expensive wristwatches and shoes. But does this piecemeal strategy really address the foundational issues of GST, or is it just a short-term measure to boost revenue?
The Need for a Comprehensive Revenue Performance Analysis
What is desperately needed now is a systematic analysis of GST’s revenue performance since its introduction over seven years ago. Such a study should remove the effects of external shocks, such as the pandemic, to understand the true revenue potential of GST.
When comparing current GST revenues to the collections from pre-GST taxes, many believe that revenues have stagnated at around 5.6% of the GDP, excluding the cess proceeds. This rate is notably lower than during the pre-GST period. However, these figures need validation and careful examination before forming a conclusion. More frequent changes to GST rates and exemptions have left taxpayers and businesses struggling with uncertainty—an instability that is in stark contrast to the promised simplicity and consistency of the GST regime.
Struggles of Cohesion and Technical Rationale
In the early days of GST, the Council operated with a high degree of cohesion, with a focus on economic rationale and a unified approach. Today, however, GST decisions often appear influenced by political considerations and short-term revenue targets. The weighted average GST rate has reportedly fallen significantly below the anticipated “revenue-neutral rate” (RNR) of 15-15.5%. It’s important to remember that this RNR was originally computed with far fewer exemptions, making the target an unrealistic one today.
Revisiting the Exemptions and GST Structure
To achieve the economic, productivity, and revenue gains envisioned for GST, the GST Council needs to expand the tax base as widely as possible. The only logical exemptions should be for unbranded food and farm products—items of basic necessity. The current high number of exemptions undermines the GST’s core principle of seamless input-output matching, which is key for revenue generation.
A Call for Slab Reduction and Simplification
The Council should also consider reducing the number of GST slabs. The ideal reform would involve cutting down the number of main GST slabs from four to two, supplemented by a special rate for luxury and demerit goods. Simplifying the slab structure could make compliance easier and potentially reduce the average GST rate to around 10%, comprising a merit rate of 8% and a standard rate of 12%. Such a reduction would make the tax system far less burdensome for both businesses and consumers.
Compensation Cess and Its Future
The “compensation cess”—originally introduced to compensate states for any loss of revenue during the transition to GST—is another topic under discussion. Its continuation beyond March 2026 should depend on a thorough evaluation of GST’s revenue potential post-revamp. Simply continuing the cess without addressing the underlying revenue collection issues could lead to a distorted GST structure.
Case Law Insights
The recent case law from the Madhya Pradesh High Court highlights the issues stemming from flawed GST cancellation notices. Such rulings underline the need for clear and structured GST regulations that protect taxpayer rights and avoid arbitrary cancellations. By focusing on making GST more taxpayer-friendly and less complex, we can achieve a system that genuinely works for the people it serves.
Conclusion: Systematic Reforms Are Essential
The GST Council has the opportunity to live up to its mandate by taking concrete steps to achieve economic productivity and revenue growth. Rather than temporary and piecemeal fixes, the Council should aim for a holistic reform of the GST framework. Only then can we ensure that GST, as a destination-based indirect tax, fulfills its promise of revenue efficiency and simplicity for both taxpayers and administrators.