Opinion Steps to rationalise GST slabs: Simpler is better

Since the shift to GST, the indirect tax regime in India has been plagued by many problems, stemming from the multiplicity of rates, compliance and classification issues, and inverted duty structure. Over the years, while the GST Council has taken steps to ease the taxpayer’s burden, on the issue of rate rationalisation, there has been little progress. The Group of Ministers (GoM) on rate rationalisation was originally set up in the 45th meeting of the GST Council in 2021. There now appears to be a renewed push to rationalise the tax slabs. In his Independence Day speech, Prime Minister Narendra Modi announced the ushering in of the next-generation GST reforms by Diwali this year. “The government will bring next generation GST reforms, which will bring down tax burden on the common man. It will be a Diwali gift for you,” he said. Considering the sheer complexity of the current system, and the space for discretion it creates, steps to rationalise the tax slabs are welcome.

The proposal involves replacing the current system of multiple slabs — with main rates of 5 per cent, 12 per cent, 18 per cent and 28 per cent, along with cesses — with a two slab structure — 5 per cent and 18 per cent — and a 40 per cent rate for a few items, including sin and demerit goods. This is said to entail shifting almost all items under the current 12 per cent slab to 5 per cent — the 12 per cent slab accounted for just 5-6 per cent of GST collections in 2023-24 — and moving 90 per cent of items taxed at 28 per cent to the 18 per cent slab. This proposal has been sent to the GoM, which is expected to meet this week to discuss the issue.

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The GST rate (weighted average) has fallen from 14.4 per cent in 2017 to 11.6 per cent by September 2019. This is lower than the 15.3 per cent recommended by the Subramanian committee. While any move to bring down the tax burden on the consumer will have revenue implications, there are expectations that lower rates and a simplified structure will lead to higher consumption and better compliance. It is possible that the proposal may face some resistance from states owing to a likely loss in revenues. Thus, any rate rationalisation exercise will have to build consensus in the GST Council, while taking into consideration the revenue implications of such a move for both the Centre and the states.