Since its introduction in July 2017, the Goods and Services Tax (GST) has transformed India’s indirect tax regime, replacing a complex web of central and state taxes with a unified framework. GST was heralded as a landmark reform aimed at simplifying taxation, improving compliance, and fostering economic integration across the country. However, more than six years since its implementation, the time has come to revisit and rationalize the GST structure to address emerging challenges and make it more efficient and equitable.

Why a Comprehensive Review of GST Rates is Essential

GST operates under a multi-slab rate structure, including 5%, 12%, 18%, and 28%, along with an additional cess on certain luxury and sin goods. This tiered structure was designed to balance revenue generation with the need to keep essential goods affordable. However, it has also resulted in some unintended complications:

• Complexity: The existence of multiple tax slabs and frequent changes to tax rates have created confusion among businesses and consumers.
• Disparities in Classification: Several goods and services face disputes regarding their categorization, leading to legal battles and administrative hurdles.
• State-Central Revenue Conflicts: States with higher consumption tend to benefit more, while producer states often find themselves at a disadvantage, leading to disagreements about revenue-sharing mechanisms.
• Tax Evasion: Despite significant technological advancements like e-invoicing, GST Network (GSTN), and mandatory reporting, the issue of tax evasion persists, impacting the overall revenue potential.

A comprehensive review is essential to simplify the structure, address ambiguities, and ensure that the GST system aligns with the goals of economic growth and fiscal sustainability.

Challenges with the Current System

The current GST framework has achieved significant milestones but is not without flaws. Some of the key challenges include:

1. Rate Overlaps: Certain products, like packaged foods, find themselves taxed at multiple rates depending on specific attributes, such as branding or packaging, causing confusion.
2. High Compliance Burden: Small and medium enterprises (SMEs) often struggle with the frequent changes in rates and rules, leading to higher costs of compliance.
3. Exclusion of Key Sectors: Major revenue-generating sectors like petroleum, electricity, and real estate remain outside the GST framework, leading to inefficiencies and a fragmented tax base.
4. Revenue Shortfalls: While GST collections have steadily improved, they are still below the potential required to meet India’s ambitious economic goals.

The Need for Rationalization and Reform

Experts and policymakers have called for a rationalization of GST rates to simplify the system and make it more efficient. Some of the key recommendations include:

• Reducing the Number of Slabs: Moving from the current four-slab structure to a two- or three-slab system could greatly simplify the tax regime. For instance, a lower slab for essentials, a standard rate for most goods and services, and a higher rate for luxury and sin goods would provide clarity.
• Broadening the Tax Base: Bringing excluded items like petroleum products, electricity, and real estate under the GST ambit would not only simplify taxation but also increase revenue.
• Correcting Anomalies in Classification: Establishing clear guidelines for classifying goods and services will reduce litigation and improve compliance.
• Strengthening Technology and Enforcement: Continued investment in GSTN infrastructure and strict measures against tax evasion are critical to realizing the full revenue potential.

GST Council’s Role in Driving Change

The GST Council, comprising representatives from both the central and state governments, plays a pivotal role in shaping the future of GST. The 50th GST Council meeting earlier this year highlighted the need to address structural issues within the system. Recommendations for rationalizing rates, addressing anomalies, and simplifying compliance processes are now gaining momentum.

The council must prioritize reforms that balance the dual objectives of ensuring fiscal stability and reducing the compliance burden on businesses. By focusing on these areas, GST can truly become a game-changer for India’s economic growth.

The Path Ahead

India’s ambition to become a $5 trillion economy by the end of this decade hinges on the efficiency of its tax systems. A simplified and transparent GST framework will not only boost investor confidence but also improve the ease of doing business, attract foreign direct investment, and enhance overall economic efficiency.

Moreover, aligning GST reforms with global best practices will help India remain competitive on the world stage. Countries with simpler tax systems often see better compliance rates and lower administrative costs, making them attractive destinations for businesses. India can learn from these examples and create a GST model that is both inclusive and robust.

A comprehensive review of GST rates is no longer a matter of debate but a necessity. Rationalizing the rates, broadening the tax base, and simplifying compliance will not only benefit businesses and consumers but also enhance the government’s ability to meet its revenue targets. The GST Council must take bold and decisive steps to address the existing challenges and ensure that GST fulfills its promise of being a truly “good and simple tax.”

The journey toward a simplified GST system is a step forward in creating a more inclusive and prosperous India. It is time for policymakers, businesses, and citizens to collaborate and make GST a powerful tool for economic transformation.