PwC bats for 3-tier GST rate structure to cut disputes, simplify tax regime

Marking eight years of GST, PwC recommends streamlining tax slabs, removing compensation cess, and aligning India's tax regime with OECD neutrality principles

A shift from the current four-tier Goods and Services Tax (GST) rate structure to a three-tier system is essential to reduce interpretational disputes, improve tax certainty, and simplify compliance, according to PwC India’s latest report, Eight Years of GST: A Time to Reflect, A Time to Reform.

 

“A comprehensive review of GST rate slabs is required to minimise the disparity between the GST rate on inputs as against that on output, especially for sectors such as electric vehicles, aviation and e-commerce, which face credit accumulations on account of the inverted tax structure,” the report said.   

 

 

Cess regime creates working capital blockages

 

PwC also highlighted the complexities created by the compensation cess, which was initially introduced for five years to offset states’ revenue losses from GST implementation, and has since been extended until March 2026.

 

The cess, levied on products such as tobacco, automobiles, coal and aerated beverages, has led to working capital blockages for businesses whose inputs attract the cess but whose outputs do not—leaving tax credits non-recoverable.

 

“With strong GST collections addressing fiscal concerns, the reasons for the introduction of the cess in 2017 no longer apply,” the report notes, adding that the levy could either be scrapped entirely or merged into the GST rate structure to simplify compliance and reduce business costs.   

 

Need for global alignment on tax neutrality

 

The report also underscores the need to align India’s GST system with global principles of tax neutrality, as advocated by the Organisation for Economic Co-operation and Development (OECD). Under these principles, businesses should have an unfettered right to claim input tax credits so that the tax burden ultimately falls on the final consumer rather than on business intermediaries.

 

Examples of this alignment, as noted in the report, could include allowing input tax credit for construction services and credit on employee-related expenses.   

 

Robust collections, but reform at a critical juncture

 

India’s GST collections have demonstrated strong growth, with monthly average revenues rising from ₹0.9 lakh crore in 2017–18 to ₹1.84 lakh crore in 2024–25. In April 2025 alone, GST collections hit a record ₹2.37 lakh crore, reflecting robust domestic consumption and higher imports.

 

However, PwC cautioned that the GST regime is at a “critical juncture.” Beyond rate rationalisation and tax base expansion, the report recommends technology-driven reforms, trust-based audits, and clearer rules for emerging sectors such as e-commerce, electric vehicles, cryptocurrencies and AI-powered services.   

 

Appellate tribunal helpful, but wider reforms needed

 

While the operationalisation of the GST Appellate Tribunal (GSTAT) is expected to ease dispute resolution, PwC stressed that broader legislative and administrative reforms are necessary to maintain India’s momentum as a competitive global economy.

 

As GST approaches its tenth anniversary in 2027, the report concludes that the next phase of reforms will be critical to ensuring that India’s tax system remains robust, business-friendly, and aligned with global best practices.