<p class="bodytext">The critical Goods and Services Tax (GST) Council meeting to discuss the Centre’s proposal for ‘significant reforms’ in GST is slated for September 3 and 4. The proposed reforms span three pillars — structural changes, rate rationalisation and ease of living.</p>.<p class="bodytext">It is the second sub-pillar under rate rationalisation — the 'move towards a simpler tax structure with two slabs, standard and merit, with special rates only for a few select items' — that is drawing the most attention. The multiplicity of rates (5%, 12%, 18%, 28%, along with separate rates for diamonds, precious stones and gold/silver) has long been a lightning rod for criticism. There was little appreciation for the fact that, when GST was introduced, the Centre had to balance equity and revenue considerations, and offer an extraordinary sweetener to the states in the form of a compensation cess to offset potential revenue losses due to GST implementation.</p>.Address misgivings over GST changes.<p class="bodytext">So, the present announcement is welcome — after eight years, a review was indeed overdue. But the speed at which matters are moving has caught everyone by surprise. There is talk of implementing the changes by Navaratri.</p>.<p class="bodytext">These proposed changes have revenue implications for both the Centre and the states. It may be recalled that total GST revenue in FY 2024–25 stood at Rs 22.08 lakh crore. With the 12% slab, which contributes around 5%, being done away with, the movement of nearly 99% of goods from the 28% slab to the 18% slab, and the push to meet aspirational goals of the common man (suggesting a shift of some goods from the 18% slab), there is bound to be a revenue impact. Estimates of the potential annual revenue loss range from Rs 85,000 crore (State Bank of India research) to Rs 1.1 lakh crore (UBS report). The compensation cess is likely to end in March 2026.</p>.<p class="bodytext">Discussions around possible buoyancy, a spurt in demand and consumption, and a resulting increase in revenue are, as Donald Rumsfeld infamously put it, “known unknowns” and “unknown unknowns” — offering little respite to the states. The uncertainties caused by the impact of US tariffs on revenue and employment, the recent ban on the online gaming industry, which resulted in a revenue loss of over Rs 20,000 crore, must also be kept in mind. The elbow room available to states for raising revenue is limited. The Centre will have to do a lot of number crunching in the GST Council to assuage the concerns of all states.</p>.<p class="bodytext">The concerns will not be limited to opposition-run states, which are likely to voice them loudly, but will also come from ruling party-led states, which would do so within the confines of their respective Vidhana Soudhas. Promises by parties that lead to 'public welfare measures provided free of charge', as the Reserve Bank of India (RBI) terms them, span the entire political spectrum and are a fact of life of our current political economy. So, there should not be any finger-pointing or pontification.</p>.<p class="bodytext">The Centre’s financial position is also stretched — RBI’s regular dividend payouts notwithstanding, they cannot make good the loss. The Centre must necessarily offer some out-of-the-box solutions to address the shortfall in states’ commercial tax collections — at least until the contours of the new tax regime settle. It should not be forgotten that the present proposal has come from the Centre, not from the Group of Ministers (GoM) constituted for this purpose. The Centre must now show the same magnanimity in listening to the concerns of the states as it did during earlier periods of fiscal stress.</p>.<p class="bodytext">The issue of revenue should not distract from other important matters likely to be on the agenda of the GST Council. The inverted duty structure, where the tax on inputs exceeds that on the final product, leading to the accumulation of input tax credit, has long been a problem under GST and is likely to worsen with rate rationalisation. Exemptions also contribute to such accumulation and must be pruned.</p>.<p class="bodytext">Refund mechanisms should be robust and transparent. A national advance ruling authority is needed to address the issue of conflicting rulings issued by various state advance ruling authorities. The GST Tribunal must begin functioning urgently to reduce the load on the courts. The GST Network (GSTN) will need time to implement the changes once approved by the Council, as will the industry, which must rise to the occasion and ensure that the benefits of rate reduction are passed on to consumers.</p>.<p class="bodytext">There is too much at stake for both the Centre and the states — the goal of a Viksit Bharat demands that both parties approach the meeting with an open mind and in the 'true spirit of cooperative federalism'.</p>.<p class="bodytext"><span class="italic"><em>(The writer is retired chairman, Central Board of Indirect Taxes & Customs)</em></span></p>
<p class="bodytext">The critical Goods and Services Tax (GST) Council meeting to discuss the Centre’s proposal for ‘significant reforms’ in GST is slated for September 3 and 4. The proposed reforms span three pillars — structural changes, rate rationalisation and ease of living.</p>.<p class="bodytext">It is the second sub-pillar under rate rationalisation — the 'move towards a simpler tax structure with two slabs, standard and merit, with special rates only for a few select items' — that is drawing the most attention. The multiplicity of rates (5%, 12%, 18%, 28%, along with separate rates for diamonds, precious stones and gold/silver) has long been a lightning rod for criticism. There was little appreciation for the fact that, when GST was introduced, the Centre had to balance equity and revenue considerations, and offer an extraordinary sweetener to the states in the form of a compensation cess to offset potential revenue losses due to GST implementation.</p>.Address misgivings over GST changes.<p class="bodytext">So, the present announcement is welcome — after eight years, a review was indeed overdue. But the speed at which matters are moving has caught everyone by surprise. There is talk of implementing the changes by Navaratri.</p>.<p class="bodytext">These proposed changes have revenue implications for both the Centre and the states. It may be recalled that total GST revenue in FY 2024–25 stood at Rs 22.08 lakh crore. With the 12% slab, which contributes around 5%, being done away with, the movement of nearly 99% of goods from the 28% slab to the 18% slab, and the push to meet aspirational goals of the common man (suggesting a shift of some goods from the 18% slab), there is bound to be a revenue impact. Estimates of the potential annual revenue loss range from Rs 85,000 crore (State Bank of India research) to Rs 1.1 lakh crore (UBS report). The compensation cess is likely to end in March 2026.</p>.<p class="bodytext">Discussions around possible buoyancy, a spurt in demand and consumption, and a resulting increase in revenue are, as Donald Rumsfeld infamously put it, “known unknowns” and “unknown unknowns” — offering little respite to the states. The uncertainties caused by the impact of US tariffs on revenue and employment, the recent ban on the online gaming industry, which resulted in a revenue loss of over Rs 20,000 crore, must also be kept in mind. The elbow room available to states for raising revenue is limited. The Centre will have to do a lot of number crunching in the GST Council to assuage the concerns of all states.</p>.<p class="bodytext">The concerns will not be limited to opposition-run states, which are likely to voice them loudly, but will also come from ruling party-led states, which would do so within the confines of their respective Vidhana Soudhas. Promises by parties that lead to 'public welfare measures provided free of charge', as the Reserve Bank of India (RBI) terms them, span the entire political spectrum and are a fact of life of our current political economy. So, there should not be any finger-pointing or pontification.</p>.<p class="bodytext">The Centre’s financial position is also stretched — RBI’s regular dividend payouts notwithstanding, they cannot make good the loss. The Centre must necessarily offer some out-of-the-box solutions to address the shortfall in states’ commercial tax collections — at least until the contours of the new tax regime settle. It should not be forgotten that the present proposal has come from the Centre, not from the Group of Ministers (GoM) constituted for this purpose. The Centre must now show the same magnanimity in listening to the concerns of the states as it did during earlier periods of fiscal stress.</p>.<p class="bodytext">The issue of revenue should not distract from other important matters likely to be on the agenda of the GST Council. The inverted duty structure, where the tax on inputs exceeds that on the final product, leading to the accumulation of input tax credit, has long been a problem under GST and is likely to worsen with rate rationalisation. Exemptions also contribute to such accumulation and must be pruned.</p>.<p class="bodytext">Refund mechanisms should be robust and transparent. A national advance ruling authority is needed to address the issue of conflicting rulings issued by various state advance ruling authorities. The GST Tribunal must begin functioning urgently to reduce the load on the courts. The GST Network (GSTN) will need time to implement the changes once approved by the Council, as will the industry, which must rise to the occasion and ensure that the benefits of rate reduction are passed on to consumers.</p>.<p class="bodytext">There is too much at stake for both the Centre and the states — the goal of a Viksit Bharat demands that both parties approach the meeting with an open mind and in the 'true spirit of cooperative federalism'.</p>.<p class="bodytext"><span class="italic"><em>(The writer is retired chairman, Central Board of Indirect Taxes & Customs)</em></span></p>
