Centre revives plan to simplify GST rates
Context:
The Goods and Services Tax (GST) has been a transformative tax reform in India, aiming to simplify the tax structure and promote a unified economic system. However, the complexity of GST rates has been a persistent concern for businesses and policymakers. The government’s attempt to rationalize these rates has recently gained momentum.
Background:
- The Group of Ministers (GoM) on GST rate rationalization was initially formed in the year 2021 and was led by former Karnataka CM Basavaraj Bommai.
- However, with the reconstitution of the GoM under the leadership of Uttar Pradesh Finance Minister Suresh Kumar Khanna, there is a renewed focus on addressing the intricacies of GST rates.
- While the official GST structure comprises four main slabs (5%, 12%, 18%, and 28%), but in practicality there are about a dozen different rates with some items having zero rate which is complicating the whole tax compliance.
- The rekindling of discussions on GST rate simplification reflects a recognition of the long-pending demand from industry leaders and tax experts.
Key Highlights:
- Tax experts and industry stakeholders emphasize the urgency of restarting the rate rationalization plan, given the compliance-related challenges arising from numerous tax rates. Professor Sacchidananda Mukherjee from the National Institute of Public Finance and Policy highlights the government’s acknowledgment of the necessity to simplify the rate structure, providing clarity for investors and easing tax compliance.
- The GoM’s unchanged terms of reference include considerations on the future of the GST Compensation Cess.
- The last GST Council meeting in October initiated discussions on a “perspective plan” for imposing a cess or surcharge post-March 2026, when the GST Compensation Cess is set to expire.
- Confederation of Indian Industry advocates for streamlining GST rates into a three-slab structure to facilitate business operations and minimize litigations arising from classification disputes.
- Causes:
- The existence of multiple GST rates, beyond the four main slabs, contributes to compliance-related challenges and confusion among businesses. For example, on gold it is kept at 3% and rough precious and semi-precious stones that are placed at a special rate of 0.25% under GST.
- The intricate GST rate structure creates uncertainty for investors, affecting investment decisions and economic growth.
Goods And Services Tax (GST):
GST is a value-added tax imposed on most goods and services for domestic consumption, representing a significant tax reform in independent India’s history.
- Implemented on July 1, 2017, it consolidates nearly all domestic indirect taxes, except for petroleum, alcoholic beverages, and stamp duty.
Key Features:
- GST applies to the ‘supply’ of goods or services, departing from the traditional taxation based on manufacturing, sale, or service provision.
- Unlike origin-based taxation, GST operates on the principle of destination-based consumption taxation.
- Both the Centre and States levy tax concurrently on a shared base, termed Central GST (CGST) and State GST (SGST), respectively.
- Import of goods or services is considered inter-state supplies, subject to Integrated Goods & Services Tax (IGST) and applicable customs duties.
- CGST, SGST, and IGST rates are mutually agreed upon by the Centre and States, with multiple rates (5%, 12%, 18%, and 28%), along with specific rates for gold and precious stones.
GST Council:
- Constitutional Body: Established under Article 279A, advising Union and State Governments on GST-related issues.
- Composition: Chaired by the Union Finance Minister, includes Union State Minister of Revenue or Finance, and Finance or Taxation Ministers from all States.
- Federal Representation: Recognized as a federal body, ensuring representation for both the Centre and States.
Way forward:
A comprehensive review of the GST Compensation Cess is recommended to ensure its alignment with long-term economic goals and objectives. The government’s acknowledgment of the need for simplification reflects an understanding of investor needs for a transparent and predictable tax regime.
