GST: Neither Good, Nor Simple
The Group of Ministers’ (GoM) recent recommendations to revise GST rates for over 148 items, including readymade garments, have triggered intense debate. Although the proposals aim to balance affordability with revenue collection, they risk further complicating an already convoluted GST structure.
GoM’s Objective and Rationale
The GoM has outlined two primary objectives behind its recommendations:
- Curb Inflationary Pressure
The plan seeks to make premium products more expensive while reducing taxes on items targeted toward lower-income households. - Enhance Revenue Collection
By introducing higher tax slabs for luxury goods, the government hopes to boost GST collections, enabling subsidies for essential goods.
However, this approach introduces significant challenges. It complicates the GST framework, undermining the tax regime’s original promise of simplification.
Multiplicity of GST Rates: A Persistent Challenge
India’s GST structure continues to face criticism for its multiple tax slabs, which create several issues:
- Inconsistent Rates for Similar Items
For instance, there’s no GST on a bun, but adding cream raises the rate to 18%. Similarly, classification disputes arise over items like Parachute (hair oil or coconut oil?) or KitKat (biscuit or chocolate?). - Complex Compliance Requirements
Both businesses and consumers struggle to navigate intricate classifications, leading to inefficiencies and frequent disputes. - Illogical Tax Applications
Examples like separating buns and cream to avoid higher taxes highlight how counterproductive the current system has become.
Impact on Economic Growth and Consumption
The GoM’s recommendations, if implemented, may negatively affect the economy in two key ways:
- Slowing Economic Recovery
India’s sluggish GDP growth and weak private consumption demand a stable GST regime. Arbitrary tax hikes could further strain vulnerable sectors, such as apparel, risking MSME closures and job losses. - Disincentives for Compliance
Higher rates might push businesses into informal channels, reducing the tax base and undoing efforts to formalize the economy.
A Call for Simplification
India’s GST was envisioned as a “Good and Simple Tax.” Yet, its current framework has deviated significantly from this goal. To regain its original purpose, the following reforms are necessary:
- Reduce Tax Slabs and Exemptions
Simplifying the GST structure will make compliance easier and prevent classification disputes. - Expand the Tax Base
Including high-revenue items like fuel and liquor—currently excluded—could stabilize revenues without frequent rate changes. - Focus on Stability and Predictability
Frequent rate adjustments erode trust in the system. A stable GST regime is crucial to foster confidence among businesses and consumers alike.
Conclusion
No GST system is without flaws. However, India’s current framework leans excessively toward complexity, undermining its potential as a “great simplifier.” Instead of resolving fundamental issues, the GoM’s proposals risk worsening inefficiencies. The government must focus on a stable, simplified GST system with broader coverage to ensure fairness, growth, and compliance in India’s tax ecosystem.
