GST rates must be increased to boost revenue kitty, need for compensation will go down, says former CEA

The Goods and Services Tax Council must consider raising rates of the indirect tax levy, which would help improve tax collections and also negate the need to continue with newer levies after the end of the compensation cess, said former chief economic advisor Arvind Subramanian.

“My own view is that the compensation cess should not be renewed completely…because of a compensation induced moral hazard. Now, if you then say that the Finance Commission should make some provision for this … to compensate for that, that's also a form of moral hazard. The solution to this has to be that rates go up, revenues go up, and the need for compensation diminishes,” he said at a conference on Friday organised by the Centre for Policy Research title ‘The GST Story: Whither Next?’

Responding to a question on what should be done with the compensation cess, which comes to an end soon, Subramanian underlined that the best solution would be to raise rates so that the revenue kitty goes up and the need for compensation comes down

At present, GST has five broad rates of zero, 5%, 12%, 18% and 28% as well as a cess that is levied above the highest rate on specified luxury and demerit goods. It will come to an end on March 31, 2026, and the GST Council has set up a Group of Ministers to look into what happens to the cess post its sunset date. The issue is likely to be taken up in the upcoming meeting of the GST Council in Jaisalmer on December 21.

Subramanian, who during his tenure as CEA, had suggested a three tier GST structure with one rate for essential goods, a standard 18% rate, and a 40% levy for demerit goods in 2015, also lamented that the GST Council now only looks at reducing rates or exempting goods and services from GST. “We need an increase in the rate. We brought the rate down from 15.5% to 11% but the GST Council has become a Council that only discusses rate cuts and exemptions. It's become a rate cutting committee and an exemption granting committee, and part of it is because of the compensation that happens,” he said.

He also noted that due to the varying rates on goods and services, there must be by now as many as 50 rates for cess and 100 for GST in the current system.

While hailing GST as the largest tax reform and noting that it showcased Indian economic policy making at its best, Subramanian also raised concerns about excessive tax demands being raised by GST officials. “There is something about GST that has encouraged excessive tax demands. The tax terrorism that GST has introduced, we need to focus on,” he underlined, adding that part of it is because the government now has more data on GST.