An Uncertain Tax (GS Paper 3, Economy)
Context:
- The Goods and Services Tax (GST) continues to face significant challenges, as unresolved issues persist.
- In its 55th meeting, the GST Council deferred decisions on several critical matters, particularly on rate rationalisation and compensation cess.
- The Group of Ministers (GoM) tasked with addressing these contentious issues was granted more time to examine them further.
Introduction
- The GST Council has yet to resolve several key issues, including lowering GST rates on health and life insurance and food delivery charges by platform aggregators.
- Additionally, the GoM on rate rationalisation and compensation cess was given an extension to further evaluate these matters.
Major Pending Decisions
- Lowering GST Rates: Focus is on health and life insurance, and food delivery charges by platform aggregators.
- Rate Rationalisation: The GoM on this issue has requested additional time for a detailed examination.
- Compensation Cess: The GoM tasked with this matter was also granted an extension.
Oddities in GST Rate Structure
- Popcorn Tax Rates:
- Popcorn with salt/spices: 5%
- Pre-packaged and labelled popcorn: 12%
- Popcorn mixed with sugar: 18%
- Classification Anomalies:
- Tax Differences: There are differing tax rates for buns and cream buns.
- Frozen Parathas vs. Rotis: Tax distinctions exist between packed/frozen parathas and rotis, raising questions about the consistency of classifications.
International Comparison
Among 115 countries with GST or VAT systems, only five countries, including India, have four or more GST slabs. In contrast, the majority of countries adopt simpler structures:
- 28 countries use two tax rates.
- 49 countries have a single tax rate.
A multiple-level rate structure increases compliance burdens, opens the door for bureaucratic discretion, and contradicts efforts to improve ease of doing business.
Call for Rationalisation
- Discussions, including those during the 45th GST Council Meeting (September 2021), have stressed the need to simplify the GST system by reducing the number of slabs and maintaining revenue neutrality.
- These measures are essential for improving the efficiency and fairness of the GST regime.
Way Forward: Recommendations
Resolve Pending Issues:
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- Expedite decisions on rate rationalisation and compensation cess.
- Address classification anomalies to ensure consistency in the tax structure.
Simplify the GST Structure:
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- Reduce the number of GST slabs to align with international best practices.
- Simplify compliance processes to make it easier for businesses to adhere to the tax system.
Focus on Revenue Neutrality:
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- Ensure that any changes to GST rates are revenue-neutral to avoid destabilising fiscal balance.
Conclusion
- The GST Council must urgently resolve issues related to rate rationalisation and the compensation cess.
- Although the council has already implemented measures to address some gaps, a consensus on these pressing issues must be reached soon to ensure the efficiency and fairness of India’s GST system.
