Paper: GS – III, Subject: Economy, Topic: Taxation, Issue: Proposed reforms in the GST system.
Context:
The GST Council approved a simplified two-rate structure (5% and 18%) with a special 40% sin tax, reducing rates on essentials effective September 22.
Key Takeaways:
Genesis of GST:
- Origin: Based on Vijay Kelkar Task Force recommendations (2002).
- Launch: July 1, 2017 – It replaced excise duty, VAT, service tax, etc. with one unified indirect tax.
- Structure: Multi-tiered (5%, 12%, 18%, 28%) + special rates (0.25% on precious stones, 3% on jewellery).
- Achievements:
- Doubled indirect tax base to 1.52 crore businesses.
- Integrated a national market.
Issues with the current GST System:
- Too Many Tax Rates: Multiple slabs (0%, 0.25%, 1%, 3%, 5%, 12%, 18%, 28% + cesses) create complexity and misclassification disputes.
- Revenue Neutral Rate (RNR) Gap: Average GST rate has fallen to 12%, below the recommended RNR of 15–15.5% (Arvind Subramanian Committee), reducing revenue for Centre & States.
- Inverted Duty Structure: Higher GST on inputs than outputs (e.g., textiles) has led to accumulation of unutilised ITC (Input Tax Credit) aggravating working capital crunch.
- Multiple exemptions: Exempting output without refunding input taxes leading to hidden tax burden, distortions, and evasion risks.
- Delay in GST Tribunals: Non-establishment of GST Appellate Tribunals is forcing taxpayers to approach High Courts leading to backlogs and delayed justice.
Next Gen GST Reform:
Development-Oriented Structural Reform:
- Correction of inverted duty structures to reduce working capital blockage.
- Enhances competitiveness of domestic manufacturing which supports Atmanirbhar Bharat.
Rate Rationalisation: Two-Slab System:
- Simplified from 4 slabs to two slabs: 5% and 18%.
- Shifts:
- 99% of items in 12% slab: 5%.
- 90% of goods in 28% slab: 18%.
- Impact:
- Essentials such as food items, toiletries, packaged goods etc will get cheaper.
- Consumer durables such as ACs, refrigerators, TVs may become affordable.
Ease of Living and Business:
- Tech-driven simplification: Pre-filled returns, automated refunds.
- Support to MSMEs/startups: Lower compliance cost, faster ITC availability.
Significance of reforms:
GST Council as the Reform Engine:
- Decision-making body: It consists of both Union Finance Minister and State Finance Ministers.
- Voting:
- Centre → 1/3rd weightage.
- States collectively → 2/3rd weightage.
- Decision requires 3/4th majority.
- It reflects cooperative federalism in fiscal policy.
Global Comparisions:
- International lessons: Australia (10% single rate), New Zealand (15% single rate). It shows that simpler GST entails more efficiency.
- India’s hybrid model: Retains flexibility with special rates (gems/jewellery) and high rate for sin goods (40%).
- Global competitiveness: Improves India’s attractiveness for investment and trade.
Way forward for reforms:
- Consensus building: By institutionalising Centre–State dialogue to ensure revenue balance.
- Robust technology: Ensure smooth compliance and refund processing.
- Market pass-through: Monitor whether businesses actually reduce prices for consumers.
Conclusion:
By simplifying rates, correcting structural flaws, and reducing compliance burdens, it strengthens Atmanirbhar Bharat and paves the way for India’s transition into a developed nation by 2047. Its success will depend on cooperative federalism, technology readiness, and ensuring benefits reach the common citizen.
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