A simplified GST structure: Revenue collection must be closely tracked

In his address to the nation on Sunday, Prime Minister Narendra Modi underscored how changes in the goods and services tax (GST) structure — which were cleared by the GST Council earlier this month and came into effect on Monday — would make goods and services more affordable for people and simplify operations for businesses. The GST Council, in its 56th meeting, had decided to move mainly to a two-rate structure, 5 per cent and 18 per cent, for most goods and services, with a demerit rate of 40 per cent for a select few goods. The council also did away with the compensation cess except on a few sin goods, which will be collected until the loans raised to compensate states during the pandemic are repaid. This is likely to be over in the coming few months. 

A simplified GST structure will help all stakeholders. The government expects that lower GST rates, along with income-tax relief, will boost consumption. As the Prime Minister noted, changes in the income-tax rates and GST would lead to savings of ₹2.5 trillion for the people of India. While the changes should help boost consumption, their extent and sustainability would be worth watching. Further, the other side of lowering taxes is the implication for revenue collection. Since GST is collected by the Union and state governments, both could be affected. The revenue flow to states could be affected more because part of the central government’s tax collection also flows to states. Interestingly, the Comptroller and Auditor General (CAG) last week came up with a report on state finances, the first of its kind. Since the report is for 2022-23, the numbers are not particularly new and are broadly known, but its decadal analysis and findings are still worth discussing, especially at a time when tax rates have been reduced. 

The report shows that aggregate public debt in states in absolute terms went up 3.39 times between 2013-14 and 2022-23. In terms of percentage of gross state domestic product (GSDP), public debt increased from 16.66 per cent to 22.96 per cent during the same period. Accounting for public-account liabilities, the liability of states was at about 28 per cent of GSDP. The data compiled by the Reserve Bank of India in the last report on state finances (December 2024) suggests that the liability went up in the subsequent years. The increase in levels of debt means debt-servicing costs have gone up for states, which leaves fewer resources for other purposes. For about 10 states, interest payment was over 10 per cent of their expenditure. To be fair, some states have managed their finances well, but a potential revenue loss might have a bigger impact on weaker states. 

At a broader policy level, the country has moved to a simpler GST system, which must be welcomed. Nevertheless, over the past weeks, several experts have talked about the need for the next set of reforms in the GST system. In terms of revenue, for example, it has been suggested that the 5 per cent rate could have been raised a bit to protect revenue collection. There are suggestions of revisiting the exemption list and also bringing petroleum products within the GST net, which will significantly help businesses. Thus, while the latest set of reforms will help consumers and businesses a great deal, more will need to be done in the future. Revenue implications will also need to be closely tracked.