Why there is an urgent need to rationalise both GST slabs and rates

Rationalisation of the tax structure is expected to be discussed in the GST Council meet on Sep 9. The group of state ministers would be well advised to initiate the process

A group of state ministers working on potential changes to the goods and services tax (GST) system has indicated that, for now, they (the ministers) plan to retain the current four-rate structure. Even though discussions are on and no decision has been taken yet, some members of the group have reasoned that since the GST system has stabilised, it may not be a good idea to disturb it. However, there are strong reasons why the group must contemplate ways to simplify the GST structure. Union Finance Minister Nirmala Sitharaman, who chairs the GST Council, noted in her Budget speech in July that the government would strive to further simplify and rationalise the structure and expand it to other remaining sectors. The group of state ministers would be well-advised to initiate the process. In this regard, Ms Sitharaman has clarified that the issue will be discussed in the upcoming GST Council meeting on September 9.

As suggested by experts, there is an urgent need for rationalising both slabs and rates. The Council can evaluate moving to a three-rate structure, if not fewer, at this stage: A lower rate for essential items, a moderate rate for most goods and services, and a higher rate for select items or sin goods. It has also been suggested that the 12 and 18 per cent slabs be merged, with goods and services in these being taxed at, say, 16 per cent. This would significantly reduce complications and help address some of the inconsistencies arising because of the multiplicity of rates. Besides, the adjustment and simplification will need to be done in a way that GST collection gets adjusted to the revenue-neutral rate. Notably, a large part of tax collection comes from the 18 per cent slab.

GST rates were reduced prematurely in the initial years, which resulted in significant underperformance. Although the increase in collection since its implementation looks impressive in absolute terms, as economist Arvind Subramanian and others have shown in this newspaper, net GST collection in 2023-24, including the cess component, was worth 6.1 per cent of gross domestic product, which was about the same in the pre-GST period of 2012-17. It is also worth noting that the current collection includes the compensation cess, which is being collected to repay the debt raised during the pandemic to compensate states for revenue shortfalls. The GST Council will also have to, at some point in the near future, decide about the cess once the debt is fully repaid.

One of the suggestions is to include it in the tax rate. While it will not affect the actual tax outgo on the part of the consumer, any decision will need careful examination. This is important because the cess was imposed for a limited period and for the specific purpose of raising resources to compensate states for the revenue shortfall in the first five years. Cess collection continued because the government had to borrow to compensate states during the pandemic. Broadly, the rate must be adjusted to the revenue-neutral rate. This will help increase revenue collection at both the Central and state levels. Higher revenue will augment fiscal capacity at both levels of government at a time when India needs to reduce the general government Budget deficit and public debt. Deferring the issue will delay the adjustment required in the GST system.