GST reforms: Quest for a ‘Good and Simple Tax’

Prime Minister Narendra Modi had described Goods and Services Tax (GST) as a “good and simple tax” while addressing a special session of Parliament, held on June 30-July 1, 2017, midnight to mark the rollout of indirect tax reform. “It’s good because it liberates us from layers of taxation, and it’s simple because it is uniformly implemented across India,” Modi had said.

However, it has not turned out to be so good and simple, so far. While the GST has resulted in structural changes in the country’s indirect tax system by merging the central and state taxes, uniformity and liberation from layers remain wishful thinking.

Multiple layers of taxation exist. At present, there are five key GST slabs – 0 per cent (nil rated), 5 per cent , 12 per cent, 18 per cent and 28 per cent. There are special rates of 0.25 per cent, 1.5 per cent and 3 per cent on precious metals and jewellery. In addition to these, there are multiple cesses and surcharges. There is also a complex process of sharing the revenue between the centre and the states. This makes GST a complex architecture.

The need for reform in the GST has been underlined by industry, small businesses and political parties time and again. Congress leader Rahul Gandhi has often used the complexity of GST and termed it as “Gabbar Singh Tax” to attack the economic policy of the BJP-led Union government

So, over eight years after its rollout, the prime minister has now announced his government’s plan to reform the GST to lower the tax burden on people.

This is not the first time the government has talked about the GST reform. A group of ministers (GoM) on GST rate rationalisation was formed in September 2021, under then Karnataka Chief Minister Basavaraj Bommai. The panel had submitted an interim report to the GST Council in June 2022, proposing changes in tax rates and rationalisation of the levy.

Following the change in government in Karnataka, the GST rate rationalisation panel was reconstituted in October 2023, and Uttar Pradesh Finance Minister Suresh Kumar Khanna was appointed as the convenor. The panel was reconstituted again in June 2024, with Bihar Deputy Chief Minister Samrat Choudhary replacing Khanna as convenor.

In four years, the panel has been constituted and reconstituted thrice with new faces at the helm, but it has not yet delivered on its mandate. The GoM, however, has not delivered on its mandate in the past four years. However, the prime minister’s announcement on GST reforms from the Red Fort on Independence Day on August 15 has added momentum to the process. This was palpable from the series of meetings by different departments and other stakeholders. The six-member GoM that includes West Bengal Finance Minister Chandrima Bhattacharya, Karnataka Revenue Minister Krishna Byre Gowda, Kerala Finance Minister K N Balagopal, Uttar Pradesh Finance Minister Suresh Kumar Khanna and Rajasthan Health Minister Gajendra Singh, besides Choudhary as convenor, met in New Delhi a few days after the announcement by the prime minister.

According to Choudhary, the panel has agreed to recommend the scrapping of 12 per cent and 28 per cent GST tax slabs and consolidate the items in these slabs to 5 per cent and 18 per cent rates. This is in line with the central government’s proposal. Finance Minister Nirmala Sitharaman, who is the chairperson of the GST council, addressed the GoM and said that the GST reforms would provide relief to the common people, farmers, middle class and MSMEs and help make India ‘Aatmanirbhar’. Her address to the GoM was a signal to speed up the process, which has been lingering for the past four years.

Opposition-ruled states have voiced concerns over the loss of revenue due to the proposed GST reforms. They have also voiced apprehensions that the benefits of the rate cut may be pocketed by businesses instead of being passed on to the end consumers. The states have pegged the annual revenue loss at Rs 2 lakh crore. While the independent research also points to a substantial revenue loss, a part of it may be offset by a boost in consumption. As per the SBI Research, the average annual revenue loss is likely to be around Rs 85,000 crore.

The GST council will meet in New Delhi on September 3 and 4 to decide on the proposed reforms.

The GST reform push by the Modi government comes at a time when the economy is facing serious challenges due to the imposition of high tariffs by the US on imports from India. The quality and pace of GST reforms will be critical to cushion the Indian economy from the US tariff shocks.