Will the next phase of reforms pave the way for even fewer rates and stable GST revenues?

Conceptualised by former Prime Minister Atal Bihari Vajpayee in 2000, it took more than 17 years of discussions and negotiations between the Centre and states for goods and services tax (GST) to finally see the light of day. Subsuming as many as 17 large taxes and 13 cesses at central and state levels, the implementation of GST from July 1, 2017, was seen as a combination of political wizardry and sound economics. After all, making all of India’s 29 states and seven Union territories (at that time) give up a large part of their fiscal autonomy and launch the One Nation One Tax, with different political parties helming different states, was no easy task. Some of that strain was visible in the political compromises that were struck in light of concerns over income inequity, since the initial iteration of the tax would have meant taxing both essential goods and super luxury and sin goods at the same rate. In the end, the GST was rolled out with a five-rate structure and several exclusions both in terms of sectors and taxpayers. “You cannot tax hawai chappals (rubber slippers) and rice at the same rate as a Mercedes. This is why GST had to have separate rates,” a senior minister who was part of the discussions had noted at the time. The solution was five slabs of GST—0%, 5%, 12%, 18% and 28%, along with a compensation cess on sin goods, luxury cars and aerated drinks, among others. Vijay Kelkar, Chairman of the 13th Finance Commission and former finance secretary, who headed the eponymous Kelkar Task Force on indirect tax reforms way back in the early 2000s, had also suggested a comprehensive GST based on the value added tax (VAT) principle. He has also been a firm supporter of a single GST rate along with a nil rate for exempt items and believes that moving to a 12% standard and single rate is the best way forward. “GST should have a single rate of 12%, which would make the tax simple and easy to comply with. This can be done by moving goods and services in the current slabs of 5% and 18% to the 12% slab,” he says. A similar suggestion was made by a committee headed by the then Chief Economic Adviser Arvind Subramanian on possible rates under the GST. Its report to the finance minister in December 2015 had suggested a revenue neutral rate of 15-15.5%. It had, however, suggested a two-rate structure of 12% and 17-18%. The original GST Council had felt that as the new tax system stabilised, it would be tweaked to include the excluded services and come down to, perhaps, a three-rate structure—0% on excluded items, a standard rate on most goods and services, and a high rate on sin goods and luxury items. But amending the GST framework has not been easy. Now, after 55 meetings of the GST Council, there seems to be some consensus and political will on rationalising the rates and, perhaps, doing away with the 12% slab altogether. This could make it more concise by reducing the number of rates. A decision on this is pending with the Council, which is expected to meet towards the end of August. Beyond these immediate decisions, opinion is divided on whether this tax system can move towards a three-rate structure in the longer run, which would reduce interpretational disputes, lower litigation and bring more certainty and stability for businesses and customers. Kelkar says the proposal to remove the 12% slab will, in fact, make GST more complicated and hurt small and medium businesses and exports. This is because several goods and services will have to be moved to the 18% slab, which is largely for intermediate and input goods. On the other hand, input tax credit is not available for the 5% slab. “Higher tax and lack of input tax credit will hurt small and medium businesses as well as exporters who import a lot of inputs. Eventually, it will be bad for the economy,” he says. This [GST] structure was arrived at after a long debate on equity. In a country like India, there needs to be different rates for different items consumed by various groups. - Thomas Issac, Former Finance Minister of Kerala Former Kerala Finance Minister Thomas Isaac, who was part of the original GST Council that ushered in the levy, is not in favour of tampering with the rates or reducing the number of slabs. “This structure was arrived at after a long debate on the importance of having equity. In a country like India, there needs to be different rates for different items that are consumed by various social and economic groups,” he says. For the time being, he adds, the levy should be allowed to settle so that the revenue implications can be fully understood. Isaac also points out that states are already worried about loss of revenue and fiscal autonomy and would never agree to include exempt items such as alcohol, electricity and petroleum products under the GST. “It would be a disaster for states unless the rates are significantly raised,” he avers. The government cannot solve the problem of income inequality through indirect taxes by having multiple rates for GST. Direct taxes, and more particularly a wealth tax, is the correct tool for this. - Vijay Kelkar, Chairman, 13th Finance Commission Kelkar, however, says that indirect taxes are not the right tool for income distribution. “The government cannot solve the problem of income inequality through indirect taxes by having multiple rates for GST. Direct taxes, and more particularly a wealth tax, is the correct tool for this,” he says. He recommends that items such as electricity, petroleum products and sin goods such as alcohol, that are outside the ambit of the tax, should be included. “To take care of concerns of revenue losses by states, they can impose a non-VATable excise duty on top of GST. This will take care of revenue losses while discouraging consumption of these goods,” he says. GST collections have risen sharply over the years, apart from fluctuations such as those during the Covid-19 pandemic, and amounted to over Rs 22 lakh crore in FY25. But concerns over revenue loss have scuttled several reforms, such as a proposal to include aviation turbine fuel under the levy, and have delayed a decision on the proposal to lower the 18% GST rate on insurance premium. Several states, including Himachal Pradesh, Kerala and Tamil Nadu, have also raised concerns over continued revenue losses since the introduction of GST. Most recently, Punjab Finance Minister Harpal Singh Cheema has called for compensating agrarian states that have faced a continuous loss of revenue due to the subsumption of purchase tax on foodgrains. However, a recent study by the Bank of Baroda shows that the mop-up from state GST is estimated to rise to Rs 11.1 lakh crore in FY26 from Rs 9.6 crore in FY25. “GST has the largest share of 44.2% (43.8% in FY25) in the total tax revenue and is estimated to have increased by 15.6% in FY26,” said the study. But a common question that many in Central and state governments ask related to stabilising the tax. “Why do there have to be multiple changes in tax rates at every meeting of the GST Council? These can be curtailed to only a few tweaks as and when needed. GST needs to be made more stable and certain as it is a crucial pillar of tax policy. This will also cut down litigation,” notes a senior government official. Industry, meanwhile, continues to hope for several changes. A recent report by PwC India summarised some of these expectations and said the future of the levy is expected to be shaped by the adoption of new-age technologies in tax governance. “Other key reforms may include rate rationalisation, aimed at creating a more balanced tax structure, and broadening of input tax credit eligibility parameters with minimal restrictions. Further, there is growing momentum to cover aviation turbine fuel and natural gas under the GST regime,” it said. Additionally, a forward-looking tax policy is anticipated in response to the fast growth of the economy and emergence of new sectors coupled with rising international trade headwinds, as well as to promote ease of doing business. Lowering the compliance burden under the GST is another oft-repeated demand of taxpayers, especially smaller businesses that struggle with multiple returns along with an annual return, even as the tax administration continues to struggle with evasion of GST and problems such as fake registrations and misuse of input tax credit, both of which have been rampant. The Directorate General of GST Intelligence had in FY24 found evasion to the tune of Rs 2.01 lakh crore as against Rs 1.01 lakh crore in FY23. Officials say this is just the tip of the iceberg. A slew of tax notices sent by the Centre and states to taxpayers ranging from large corporations like Life Insurance Corporation of India, Infosys and Zomato to small businesses has made GST seem more combative and less taxpayer-friendly over the years. These incidents had prompted Finance Minister Nirmala Sitharaman to assure taxpayers that the government’s intent is to make assessees’ lives easier. It has taken 25 years to reach the current framework of GST. The next 22 years, until India turns 100, will be equally crucial in heralding the next phase of this indirect tax levy. Weaving together these diverse threads and concerns to ensure that India’s big-bang reform does not get watered down is essential to attract both domestic and foreign investors, who are waiting for India’s next set of policy easing. @surabhi_prasad

Will the next phase of reforms pave the way for even fewer rates and stable GST revenues?

It's taken eight years to build consensus on rationalising rates of goods and services tax. Will the next phase of reforms pave the way for even fewer rates and stable revenues?