GST: Challenges and the Path to Reform
Context:
The recent meeting of the Goods and Services Tax (GST) Council had discussions on rate adjustments and clarifications on issues like the taxation of corporate and personal guarantees for bank loans that brought some clarity to long-standing uncertainties within the tax regime.
- Notably, the GST on molasses was reduced from 28% to 5%, a move aimed at lowering cattle feed costs and improving cash flows for sugar mills, thereby enabling faster payment of farmers’ dues. However, the decision not to tax extra neutral alcohol (ENA), which is a vital component in alcoholic beverages, was of significant importance. With alcoholic liquor still outside the GST framework, the taxation of ENA was a contentious issue that needed resolution.
- While it’s positive that the GST Council has become more active with four meetings this year, some outstanding concerns remain, such as the operationalization of GST Appellate Tribunals.
- Yet, the most pressing matter for both consumers and producers is the Council’s commitment to address the ‘perspective planning’ regarding the GST Compensation Cess and its potential replacement with a surcharge.
- Originally introduced to compensate states for revenue losses during the first five years of GST, this cess was extended due to the impact of the COVID-19 pandemic on tax collections.
- While discouraging the consumption of certain products might be reasonable, introducing a new cess should be part of a comprehensive reform effort aimed at simplifying the complex multi-rate structure of the GST. Unfortunately, this broader rationalization, initiated two years ago, remains unaddressed despite robust revenue inflows. Therefore, beyond addressing minor irritations, the GST system requires a comprehensive reform plan, which includes the incorporation of currently excluded items like electricity, petroleum, and alcohol.
Relevance:
GS – 02, GS – 03 (Judgements & Cases) (GST)
Prelims:
GST, GST council
Mains Question:
How does the recent decision of the GST Council to address long-standing tax ambiguities and the consideration of a replacement for the GST Compensation Cess reflect the need for a broader reform plan for the GST regime in India? Discuss the challenges and potential benefits associated with such a reform. (250 words)
Dimensions of the Article:
1. Clarity on Tax Ambiguities: The recent GST Council meeting sought to provide clarity on several unresolved tax treatment issues that have persisted since the GST’s implementation in 2017.
2. Tax Reduction on Molasses: The decision to reduce the GST on molasses from 28% to 5% was aimed at lowering costs for cattle feed and facilitating faster payments to sugar mills.
3. ENA Taxation Resolution: The Council’s resolution not to tax extra neutral alcohol (ENA), a key component in alcoholic beverages, is a notable development that ends years of uncertainty and legal disputes.
4. GST Compensation Cess and Surcharge: The Council’s intention to discuss the future of the GST Compensation Cess and the possible introduction of a surcharge raises questions about the evolution of this levy and its implications.
5. Complex Multi-Rate Structure: The GST regime has a complex multi-rate structure, which has been the subject of discussion for rationalization for the past two years.
6. Inclusion of Excluded Items: There is a need to consider bringing currently excluded items like electricity, petroleum, and alcohol under the GST framework for a more comprehensive tax reform.
Way Forward:
The GST regime should not merely focus on fixing minor anomalies or introducing new levies like the Compensation Cess in isolation. Instead, it should embark on a broader reform plan that simplifies the multifaceted GST structure, addresses inconsistencies, and contemplates the inclusion of currently exempted items such as electricity, petroleum, and alcohol. This holistic approach can make the GST system more efficient, equitable, and transparent.
Conclusion:
The recent decisions and discussions within the GST Council reflect the need for a comprehensive reform plan for the GST regime in India. While addressing specific issues is essential, it’s equally vital to consider the broader rationalization of the multi-rate structure and the inclusion of currently excluded items under the GST framework. A well-thought-out reform plan will contribute to a more efficient and effective GST system, ensuring it aligns better with the evolving economic landscape of the country.
