Paper: GS – III, Subject: Economy, Topic: Taxation, Issue: Reforming the GST system.
Context:
PM announced GST 2.0 reforms in Independence Day speech aiming to revive the original promise of GST – a simple, unified indirect tax structure. Effectiveness of the reforms depends on consensus in the GST Council regarding rate structure and classification.
Key Highlights:
Current GST Issues:
- Multiple Rate Slabs (5%, 12%, 18%, 28%): lead to complexity & classification disputes.
- Distorted Tax Structure: Goods with intermediate inputs taxed at higher slabs (e.g., construction).
- Selectivity in rate setting: increased compliance costs and litigation.
- High “Sin Goods” Slab (28%): Includes non-luxury items such as cement, leading to irrationalities.
- Administrative Complexity → multiple rates create confusion and hinder efficiency.
GST 2.0 Proposal:
- Replace existing 4 main slabs with:
- Reduced rate: 5%
- Standard rate: 18%
- Luxury/sin goods rate: 28% (with possible move to 40% for ultra-luxury or harmful goods).
- Restructure lower rates (0–3%) for items like bullion/jewellery.
- Move most goods/services in 12% slab → 5% category, improving simplicity.
- Maintain higher tax for demerit goods (alcohol, tobacco, ultra-luxury).
Rationale for Reform:
- Simplicity: One or two main slabs reduce disputes and compliance burden.
- Revenue stability: Broader base at standard rate ensures fiscal balance.
- Correct distortions: Ensure goods with high negative externalities face higher tax (e.g., tobacco, luxury).
- International practice: Countries like Canada, Australia follow single rate model.
Key Challenges:
- Treatment of luxury goods & sin goods: Should ultra-luxury attract 40%?
- Avoiding irrational classification such as cement at 28% despite being essential.
- Revenue trade-off: Lowering tax on mass consumption goods must not reduce overall GST collection.
- Federal consensus: GST Council must align Centre–State interests.
- Reform sequence: Need structural reform before rate merging.
Way Forward:
- Move towards 3-rate structure (reduced, standard, high for sin goods).
- Broaden tax base while keeping rates moderate.
- Ensure predictability & transparency in classification.
- Protect revenue neutrality while simplifying structure.
- GST Council role crucial for building consensus.
Conclusion:
Reimagining GST by simplifying slabs and rationalising rates can restore its original promise of being a “Good and Simple Tax.” A streamlined GST 2.0 will strengthen revenue collection, reduce disputes, and make India’s indirect tax regime globally competitive.
https://indianexpress.com/article/opinion/columns/reimagine-gst-pm-reforms10211327-10211327
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