Fixing GST: India needs a simple, stable, and predictable tax structure

The goods and services tax (GST) system is set for an overhaul in the coming weeks. It has been reported that Union Home Minister Amit Shah would initiate discussions with different stakeholders to resolve pending issues. If true, this reflects the political urgency to improve the GST system through a consensus between the central government and the states. Another news report last week showed that the Prime Minister’s Office had given in-principle approval to the restructuring of the framework. The Union government’s intention to adjust the GST system to improve its workings should be welcomed. It, however, must be noted that while GST has enabled the creation of one national market as intended, it has underperformed in terms of revenue collection, which has particularly affected the Union government’s finances. Unlike the states, the Union did not have the cushion of compensation for a revenue shortfall in the initial years.

 

As discussions move forward, the GST Council has to focus on at least three areas. First comes slab and rate rationalisation. It is now well acknowledged that one of the reasons for the underperformance of the GST system is the complexity of its rate structure and multiple slabs. Ideally, economists argue that the system should have a single rate. However, India decided to make it progressive. Even while striving to achieve this objective, the number of slabs can be reduced. In this regard, it has been reported that the 12 per cent slab will be done away with, and the items taxed at this rate will be shifted to the 5 and 18 per cent slabs. This could complicate the system. A better way will be to merge the 12 and 18 per cent slab at an appropriate rate. The objective of rationalisation should be to simplify the rate structure without losing revenue. Premature rate reductions in the initial years affected revenue collection. Gross GST collection, including the cess, in 2023-24, for example, was about 6.7 per cent of gross domestic product, as against 6.3 per cent collected from taxes subsumed in GST in 2016-17. Net collection excluding the cess was much lower in 2023-24.

 

The second aspect that the GST Council has to address is the compensation cess. Under normal circumstances, the collection of compensation cess should have ceased after the completion of five years of GST. However, it was extended until March 2026 to repay the debt incurred for compensating the states due to the shortfall in compensation-cess collection during the pandemic. Estimates suggested that the repayment will be over by December or January. If relevant provisions are not changed, cess collection will have to be stopped after the repayment is completed. Some stakeholders have suggested that the cess be subsumed in the GST rate.

 

In this regard, it must be remembered that the initial objective was to impose the cess for a limited period of five years to serve a limited objective. It was extended in exceptional circumstances. Further, contrary to the objective of simplifying the GST structure, subsuming the cess in GST rates could end up increasing the number of slabs and complicating the tax system further. So, it’s important that all such issues are taken care of in time. Different groups of ministers have worked on both rates and cess issues. Third, the GST Council should also address the compliance issues, which are raised from time to time by businesses. One of the reasons for GST’s underperformance is said to be compliance complications. The GST Council would be well advised to address all outstanding issues in one go to simplify the structure and improve revenue collection. India needs a stable and simple GST.