Rationalisation of GST Rate structure

In Context 

• It has been observed that the existing Goods and Services Tax (GST) rate structure needs to be rationalised. 

Rationale behind adopting Goods and Services Tax (GST)

• The reasons for adopting a single rate structure in most countries are to have a simple tax system, prevent misclassifications and litigations arising therefrom, and to avoid an inverted duty structure of taxes on inputs exceeding those on outputs requiring detailed scrutiny and refunds.
  • In India, items like electrical transformers, railway wagons, some textile products, plastic bags, and solar modules are examples that have inverted duty structures.

Overview of GST 

• It  is India’s biggest indirect tax reform and was introduced in India from 1 July 2017. 
  • Current scenario of the world economy depicts that more than 140 nations worldwide use the GST system. Like Canada, India adopted a dual GST (CGST and SGST) system.
•  It follows a multi-stage collection mechanism.
  • It is a single tax on the supply of goods and services, right from the manufacturer to the consumer. 
    • Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. 
    • The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Salient Features of GST

• It is applicable on ‘supply’ of goods or services as against the present concept on the manufacture of goods or on sale of goods or on provision of services.
• It is based on the principle of destination-based consumption taxation as against the present principal of origin-based taxation. 
• It is a dual GST with the Centre and the States simultaneously levying tax on a common base. 
  • The GST to be levied by the Centre would be called Central GST(CGST) and that to be levied by the States would be called State GST (SGST). 
  • An Integrated GST (IGST) would be levied an inter-state supply (including stock transfers) of goods or services. 
  • GST is being levied at four rates viz. 5%, 12%, 16% and 28%. 
• The GST would apply to all goods other than alcoholic liquor for human consumption and five petroleum products, viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel.

Benefits 

• For business and industry
  • Easy compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all taxpayer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent. 
  • Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. 
  • Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. 
    • This would reduce hidden costs of doing business.
  • Improved competitiveness: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. 
    • Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
• For Central and State Governments
  • Simple and easy to administer: GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.
  • Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.
• For the consumer
  • Single and transparent tax proportionate to the value of goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes.
    •  Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
  • Relief in overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.
• GST will give a major boost to the ‘Make in India’ initiative of the Government of India by making goods and services produced in India competitive in the National as well as International market. 

Achievements  

• Cooperative federalism:
  • In India, it has been a remarkable achievement and a unique experiment in cooperative federalism. 
    • In this, both the Union and the state governments gave up their tax autonomy in favour of harmonising domestic trade taxes. 
• Revenue Collections: 
  • GST revenues have shown reasonably high buoyancy with collections of over Rs 1 lakh crore in the last 10 months and touching a record of Rs 1.68 lakh crore in April 2022. 
• The GSTN has been able to stabilise the technology platform.
•  Mandating the issue of e-invoicing for all businesses above Rs 100 crore has enabled better invoice matching and detection of fake invoices that were used to claim the input tax credit. 
  • This has helped to improve tax compliance and has also enabled better enforcement. 

Shortcomings 

• Rate differentiation
  • This is an inefficient way of targeting benefits for the poor. 
• Lack of Dispute redressal mechanism
  • There is no statutory mechanism under the GST regime that could ensure uniformity in the rulings passed by the Authorities. 
• Constant amendments: Over the last few years, the GST law has seen many amendments. During this time, all these revisions often confused the taxpayer and as well the tax administrators which created misunderstandings and misconceptions. 
• Refund delay issues: the Government has taken many steps to smoothen the process of export refunds, automatic processing of refunds has always been an area of major concern under GST. 
• Adaption & Technical Issues: Small and medium businesses are still grappling to adapt to the tech-enabled regime. The fundamental principles on which the GST law was built viz. seamless flow of input credits and ease of compliance has been impaired by IT glitches, 
• Complex Penalties: Many businesses are genuinely not able to monitor their vendor behaviour and feel that they should not be penalised for the tax compliance deficiencies of their vendors once they have paid the GST amounts to their vendors.
• Other Concerns: Further, the 15th Finance Commission, in its report, has also highlighted several areas of concern in the GST regime relating to:
  • multiplicity of tax rates, 
  • shortfall in GST collections vis-à-vis the forecast, 
  • high volatility in GST collections, 
  • inconsistency in filing of returns, 
  • dependence of States on the compensation from Centre

Proposed Reforms 

• The committee headed by the Chief Economic Adviser estimated the tax rate at 15-15.5 per cent. 
  • It recommended that in keeping with growing international practice, India should strive towards a single rate in the medium-term to facilitate administrative simplicity and compliance, but in the immediate context, it should have a three-tier structure (excluding zero), comprising of a lower rate of 12 per cent, a standard rate varying between 17 to 18 per cent and a very high rate of 40 per cent on “demerit” goods. 
• It would be desirable to have a single rate of tax besides exemptions on unprocessed food items. 
  • It will avoid not only the problems arising from multiple tax rates but also put an end to lobbying by manufacturers for placing their products in the low tax rate category.
• It would be preferable to merge the 12 per cent and 18 per cent categories into a 15-16 percent slab and move the items in the 5 per cent category to the 8 per cent slab and remove the 28 per cent category altogether. 
  • It will result in the GST structure with two rates and as the cesses will cease after 2026 when the compensation requirement is over, it will really become a “good and simple tax”.

Way Forward

• Streamlining of anti-profiteering measures and simplification of compliance procedures also needs to be revisited to ensure that the cost efficiency and reduction in prices envisaged under GST law finally reach the common man.
• To overcome the issues of dispute related to GST and increase efficiency in tax administration, there is a need for a robust dispute redressal mechanism.

• GST requires administrative reforms which will establish a robust mechanism to redress such irregularities and will also remove gaps in the provisions of advance rulings under the GST law.
• Pandemic has had severe impacts on GST also and led to economic contraction.
  • Certain structural level changes to the law may help boost the business and economy.

Source:IE