A comprehensive review: GST Council needs to address all aspects

The group of state finance ministers (GoM), led by Bihar Deputy Chief Minister Samrat Chaudhary, formed to recommend measures for rationalising the structure of goods and services tax (GST), is reported to have finalised its recommendations, including significant adjustments to the tax rates of 148 items. However, some of the recommendations, as reported by this newspaper, are not in the right direction. In this regard, it is worth recalling why the process is being undertaken. There are at least two big reasons. First, the system has underperformed over the years, partly because of premature rate reduction. Last financial year, tax collection, including the compensation cess, was roughly equivalent to the revenue generated in the pre-GST period from taxes subsumed into the GST structure. The potential was much higher. 

Second, the compensation cess, which was to be collected only in the first five years after GST came, was extended to repay the loans raised to compensate states for the revenue loss during the pandemic. Once loan repayment is completed next financial year, collection will stop unless legal adjustments are made. Another GoM is looking into this aspect. The GST Council would do well to make changes after discussing the recommendations of both the GoMs to minimise disruption. The Council’s primary objective in undertaking the broader rationalisation exercise should be to move to a revenue-neutral rate while simultaneously reducing the number of tax slabs. The Ministry of Finance has informed Parliament that the average GST rate in 2023-24 was 11.6 per cent. The revenue-neutral rate, suggested by an expert committee at the time of GST implementation, was 15-15.5 per cent. A lower average tax rate has affected revenue mobilisation. 

Although the full set of recommendations of the GoM on rate rationalisation is not known, the reported suggestions don’t seem to be following the broad principle. It has been reported that the committee intends to recommend a new slab of 35 per cent for items such as tobacco products and aerated drinks. This would increase the number of slabs. Further, it intends to recommend taxing textile items at different rates, depending on their price. There are similar recommendations for other products as well. This is likely to complicate the tax structure further and increase disputes in terms of input credit. The GoM seems to be aiming to make the GST system progressive. However, there are limits to achieving this in the indirect tax structure. 

The idea should be to simplify the structure. This will increase compliance and reduce disputes. That will not only improve the ease of doing business, particularly for small businesses, but also help increase revenue. The Council should not repeat the mistakes that are plaguing the tax structure. Notably, the government has also informed Parliament that while tax collected at different rates cannot be calculated, estimates show 70-75 per cent of GST collection came from the 18 per cent slab last financial year. The 12 per cent slab yielded 5-6 per cent. Merging the 12 per cent slab into the 18 per cent slab thus should lead to minimal disruption. More such possibilities should be explored and evaluated. Overall, it is important for the Council to examine all relevant information to simplify the GST structure. That will benefit all stakeholders, including the government. The opportunity to address the shortcomings in the indirect tax structure should not be missed.