Goods and Services Tax (GST)

GST Rates Rationalisation back on table

Central Idea

  • The government has revived its focus on Goods and Services Tax (GST) rate rationalization by reconstituting the ministerial group of the GST Council.

About Goods and Services Tax (GST)

  • Launch and Purpose: GST, implemented on 1 July 2017, is a comprehensive indirect tax across India, replacing multiple cascading taxes levied by the central and state governments.
  • Consumption-Based Tax: It is charged at the point of supply and is based on the destination of consumption, benefiting the state where the goods or services are consumed.

GST Slabs and Their Distribution

  • Tax Slabs: GST in India is categorized into five main slabs: 0%, 5%, 12%, 18%, and 28%, with an additional cess on certain luxury and ‘sin’ goods.
  • Product and Service Coverage: The GST system covers over 1300 products and 500+ services, categorized under these slabs.
  • Periodic Revision: The GST Council revises the slab rates periodically, ensuring essential items are taxed lower, while luxury items attract higher rates.
  • 28% Slab and Cess: The highest slab of 28% is reserved for demerit goods like tobacco and luxury automobiles, with an additional cess for revenue generation.

Issues with the Current GST Structure

  • Complexity: The multi-slab structure and varying rates lead to confusion and increased compliance costs for businesses.
  • Rate Heterogeneity: Diverse rates across different goods and services complicate the tax system.
  • Dual GST System: The coexistence of CGST and SGST adds to the complexity and compliance burden.
  • Cascading Effect: Despite being a value-added tax, GST sometimes leads to cascading taxation, increasing the cost of goods and services.
  • Lack of Transparency: Invoicing under GST often lacks clarity on tax breakdown, affecting consumer awareness.
  • Collection Infrastructure: Inadequate infrastructure for GST collection leads to administrative challenges and delays.

Rationale behind GST Rationalization

  • Simplifying Tax Structure: Reducing the number of slabs can simplify the tax system, making it easier for businesses to comply.
  • Addressing Aberrations: Rationalization can correct anomalies where inputs are taxed higher than final products.
  • Revenue Concerns: Merging slabs like 12% and 18% could lead to revenue loss, necessitating careful consideration.

Benefits of GST Rationalization

  • Easier Compliance: A simplified GST structure would ease the compliance burden on businesses.
  • Equitable Tax Distribution: Rationalization ensures a fair distribution of tax burden and efficient use of revenue.
  • Improved Tax Collection: Streamlining GST slabs can lead to more efficient tax collection and reduced compliance costs.

Conclusion

  • Need for Reform: Rationalizing GST rates is crucial for enhancing the efficiency of the tax regime.
  • Expected Outcomes: A reformed GST system is anticipated to be simpler, leading to easier compliance, better revenue collection, and overall efficiency in the taxation system.

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