GST Reform Needs Holistic Approach, Not Piecemeal Changes
Recent discussions by Goods and Services Tax (GST) Council ministers indicate recommendations for rate adjustments, exemptions for lower health insurance covers, and the potential merging of the compensation cess with the top tax slab. However, the council’s Rate Rationalisation Group (GoM-RR), tasked with restructuring GST rates, is cautious, with no urgent plans for a full overhaul despite a deadline in November.
Key Insights:
- Need for Comprehensive Study: A detailed, unbiased review of GST’s performance over seven years—comparing it to pre-GST taxes—can highlight areas for improvement in revenue generation. Current estimates suggest GST collections, minus the cess, hover at 5.6% of GDP, below pre-GST levels.
- Evolving GST Council Priorities: Originally focused on cohesive economic rationale, the council now seems partially influenced by political factors, short-term goals, and lacks the technical rigor of its early days.
- Achieving Revenue Neutral Rate (RNR): There’s debate around raising the weighted average GST rate to match the RNR of 15-15.5%, initially calculated with fewer exemptions. Moving to this rate could be misguided, considering the current extensive exemptions.
- Revamping GST Structure: Reducing GST slabs from four to two, with an additional rate for luxury goods, could streamline the system. An ideal GST structure would focus on broadening the tax base, limiting exemptions primarily to unbranded food and agricultural products.
- Future of Compensation Cess: Scheduled to end in March 2026, the continuation of the compensation cess will depend on an in-depth review of GST’s revenue potential post-restructuring.
Implementing a broad-based GST with two simplified slabs—8% and 12%—can optimize revenue, reduce tax burden, and enhance productivity.
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