Paper: GS – III, Subject: Economy, Topic: Taxation, Issue: Difficulties with reforming the GST system.
Context:
India’s Goods and Services Tax (GST) recently completed 8 years. It was hailed as a milestone reform aiming to unify the national economy and eliminate inter-state frictions and tax cascades.
Key Highlights:
Achievements of GST:
- Digitized system: GST is a fully electronic system with incentives for compliance.
- Increased collections: GST collections doubled to ₹22 trillion in FY2020–21 to FY2024–25.
- Increased registrations: Number of GST registrations increased from 6.5 million (2017) to 14 million (2024).
- Revenue growth: Growth in revenue kept pace with nominal GDP, though it fell short of initial promises of “higher buoyancy”.
Persistent Challenges remain:
- Exclusions: Fuels, energy, and electricity still remain outside GST’s scope.
- Complexity: Numerous exemptions and multiple tax slabs add complexity.
- Stagnant contribution: GST to GDP ratio remains low at 6.8%, though it is gradually improving.
- Frequent changes: Frequent rate and classification changes in the 55 meetings of GST Council in 8 years leading to instability.
- Lack of dispute resolution: Legal disputes and backlog are increasing due to pending GST Appellate Tribunal (announced in 2024 but not yet constituted).
- Regressiveness of GST: GST is a consumption-based tax and tends to be regressive, as poor spend a larger share of income on consumption. Lightly taxed essentials such as food hurt the poor more if taxes increase.
| Case study: A study by the National Institute of Public Finance and Policy (NIPFP) based on NSS 2022-23 data of 2.6 lakh households points out that:GST burden on top 20%: 30.9% (urban), 41.2% (rural)GST burden on bottom 20%: 50.1% (urban), 63.1% (rural)Progressivity is missing as the burden is disproportionately higher for the poor. |
Way Forward:
- Reliance on direct taxes: Focus on direct taxes like income tax and corporation tax rather than indirect taxes to ensure fairness and redistribution.
- Differentiated GST rates: Differentiated GST rates can be considered such as levying higher rates for luxury goods and lower or zero rates for essential goods.
- Reforming tax structure: Rationalize and simplify tax structure by removing exemptions and reducing the number of slabs. Need to avoid frequent tinkering with rates and classifications
Conclusion:
GST reform must balance simplicity, revenue generation, and equity. A basket of taxes, with a strong focus on direct taxes, offers a better way to pursue tax efficiency and social justice.
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