A reform to push consumption

The long-awaited rationalisation of the GST regime has happened, with the GST Council agreeing on simplification of the present system for the first time since its 2017 introduction, which itself was delayed for many years because of political reasons. It was a welcome turn that those who had initially opposed the idea later piloted and implemented it. Despite disagreements over some details, the country finally had a common indirect tax system. The states surrendered a good part of their taxation power in the interests of uniformity and efficiency, and the system has worked till now. But it was clear that it needed reform. The government is attempting it now, though the move has also been necessitated by the tariff war US President Donald Trump has unleashed on the country.

The new tax regime will have two slabs – 5% and 18% – instead of the four slabs in the existing system. Luxury and sin items will be taxed at a new rate of 40%. The lower tax incidence on a wide range of commodities is expected to result in savings of 5 to 10% of people’s expenditure on common items of consumption. The rise in consumption can lead to an increase in production and give a boost to employment and the overall economy. The changes are also expected to help lessen the impact of the increased US tariffs on some sectors. The new tax regime is estimated to boost the economy by 20 basis points and further soften inflation by 40 basis points. It introduces a new price-based tax differential, which aims to tax two products in the same category differently based on their affordability. This is intended to ensure that affluent individuals contribute more to the country’s growth objectives and to avoid equal tax treatment of different income groups. The introduction of a new, higher tax slab for luxury and sin items also comes with a social purpose.

Most of the reforms are based on assumptions and expectations, and it is to be seen whether they will translate into measurable results. But there is a strong basis for the expectations. Some of the changes brought into the processes are also expected to facilitate easier implementation and better compliance. States had raised concerns about a potential fall in revenues caused by the changes and had sought compensation. The GST Council meeting does not seem to have discussed the matter. This is one of the issues that will require immediate intervention.