A new GST: The indirect tax system simplified for greater efficiency

The Goods and Services Tax (GST) Council’s 56th meeting on Wednesday introduced substantial changes to the indirect tax structure. The changes are expected to benefit consumers, reduce classification disputes, and enhance compliance. GST has been shifted to a comparatively simple and principally two-rate structure of 5 and 18 per cent. A special demerit rate of 40 per cent has been kept for select goods and services. Although it can be argued that GST is still not close to the ideal single-rate tax structure, the latest changes will address a number of anomalies and structural weaknesses in the system. It has also been decided that the Goods and Services Tax Appellate Tribunal will become operational for accepting appeals before the end of this month. This was a missing link in the GST architecture. The new tax structure will be effective from September 22. 

The removal of the 12 and 28 per cent slabs and the shifting of items from these slabs to 5 and 18 per cent will make a large number of consumer items cheaper. Almost all food items, for example, have been shifted to the 5 per cent rate from different slabs. Air conditioners and televisions over 32 inches will now be taxed at 18 per cent, as against 28 per cent earlier. Small cars and motorcycles will also move from 28 per cent to 18 per cent. Importantly, insurance products for individuals have been exempted. This will improve affordability and should help increase penetration of insurance coverage. Some of the issues related to the inverted duty structure, such as those  in the man-made textile and fertiliser sectors, have also been addressed. GST has also been reduced on agricultural equipment such as tractors and other machinery. The compensation cess, which is being collected to repay the debt raised for compensating states for revenue shortfall during the pandemic, will also come to an end, except on select sin goods, until the loans are fully repaid. 

At macro level, the reduction in GST rates is expected to boost demand, resulting in higher growth. According to one estimate, it could add around one percentage point to the growth rate of gross domestic product over the coming few quarters and offset the impact owing to higher tariffs imposed by the United States. However, the outcome will need to be assessed, going beyond festival and pent-up demand, driven by expectations of a rate reduction. Nevertheless, lower overall GST rates will have a cooling impact on inflation outcomes. The trickiest to judge is the fiscal impact. 

The government has said that the rate rationalisation will have a revenue implication of ₹48,000 crore. A lot will depend on how the demand responds. From a policy standpoint, the average GST rate is likely to come down further from about 11.6 per cent, which is already lower than the 14.4 per cent rate at the time of inception. The GST Council could have perhaps looked at the possibility of raising the lower 5 per cent rate by a few percentage points to boost revenue collection. While in the aggregate the consumer would have still gained, the government (Centre and states combined) would have been able to protect revenue to some extent. Further, this would have helped move in the direction of a single rate at some point in the future. It may have also allowed the GST Council to simplify the structure further, and items such as footwear, apparel, and automobiles could have been taxed at a single rate. Nevertheless, the changes are net positive and will make the indirect tax system much simpler.