Time to reset the GST system

The debate over the Goods and Services Tax (GST) rate slabs has intensified, with many states opposing changes despite growing GST revenues. The discussion centers on whether simplifying the rate structure would enhance economic efficiency and compliance, or whether it could lead to revenue losses for states.

Arguments for Rate Rationalisation

• Revenue Growth and Stability: GST revenues have shown a significant increase from Rs 94,734 crore in 2020-21 to Rs 1,84,724 crore in April-July 2024-25. This revenue growth suggests that it might be an opportune time to streamline the GST rate structure.
• Current Rate Structure Issues: The existing GST slabs (0%, 5%, 12%, 18%, and 28%) create inconsistencies and inefficiencies. Examples include the high 28% GST on cement and the 18% rate on medical insurance premiums, which seem disproportionately high given their essential nature.
• Potential Benefits of Simplification: Reducing the number of GST slabs from five to three could decrease complexity and promote economic activity. Simplified rates could also lead to better compliance and potentially higher revenues through increased consumption.

Challenges and Concerns

• State Revenue Concerns: Many states fear that rate rationalisation might lead to a loss in revenue. They are cautious about changes that could impact their fiscal health, especially if the restructuring reduces the tax base.
• Economic and Fiscal Impact: Simplification of GST rates could act as a fiscal stimulus by lowering indirect taxes. This could potentially spur economic activity and consumption, benefiting the overall economy more than incremental government spending.
• Alternative Revenue Sources: States are encouraged to explore alternative revenue sources, such as revising user charges on utilities and adjusting property-related fees. This could offset any potential revenue losses from GST rate changes and support better compliance.

Mains Question:

Q. Discuss the potential advantages and disadvantages of rationalising the Goods and Services Tax (GST) rate slabs in India. How might simplifying the GST structure impact state revenues, economic activity, and overall fiscal health? Propose alternative measures states could adopt to manage any revenue shortfall resulting from GST rate rationalisation.