TAG: GS 3 INDIAN ECONOMY
CONTEXT: The government has reconstituted the ministerial group of the GST Council that was tasked with recommending the simplification of the complex tax structure and a rejig of its multiple rates.
- Since the beginning of the introduction of the GST tax regime, there has been a call to rationalize the tax structure.
- The group of ministers (GoM) on GST rate rationalisation, headed by former Karnataka CM Basavaraj Bommai, had been in suspended mode since its formation in 2021.
- The convenor’s role for the seven-member GoM has been assigned to Uttar Pradesh Finance Minister Suresh Kumar Khanna.
CURRENT GST STRUCTURE
- The current GST structure has a total of four tax slabs, including 0%, 5%, 12%, 18%, and 28%.
- There are different forms of taxes levied under GST:
Central GST (CGST)
This tax is imposed on the movement of goods and services within the state but is appropriated by the central govt.
State GST (SGST)
It is the tax levied by the state government and appropriated in the state where the transaction occurs or where the goods are sold and consumed.
ntegrated GST (IGST)
This tax is imposed on all the goods and services between two or more states or union territories.
Union Territory GST (UTGST)
Imposed on supply of goods and services within the Indian Union Territories.
NEED FOR RATIONALISATION
- Ease-of-doing-business is needed as the current structure is quite complicated. For example, there are some items whose tax rates depend on their packaging, like specified food products, or selling prices.
- To reduce the number of litigations arising from classification disputes.
- GST is an indirect tax, which means that it is regressive in nature. Lower tax rates on some of the basic items would ease the pressure on common man.
- The frequent changes in rates for different goods and services in the past have created uncertainty for businesses.
- The 15th Finance Commission had observed that the GST’s revenue neutrality was compromised due to multiple tax rate reductions.
- Improved compliance: As too many tax rates lead to tremendous compliance-related problems.
- Improved tax collection: Higher tax rates doesn’t always imply higher revenue collection, going by the Laffer curve theory. This is proven by the fact that with reduction in tax rates on some items in the past, tax collection has only increased.
- Rate rationalization in the GST regime remains an ongoing challenge.
- There is a need for careful consideration to strike a balance between revenue generation and easing the compliance burden.