Goods and Services Tax (GST) Reform in India
The journey of the Goods and Services Tax (GST) in India is compared to the mythological churning of the ocean, where initial challenges were overcome to achieve substantial benefits, such as two consecutive months of gross GST revenues exceeding ₹2 trillion.
Need for Rationalisation
- Rate Rationalisation: The need to rationalise GST rates should be integrated with trade policy and macroeconomic objectives, rather than being viewed solely as a revenue exercise.
- Merit Rate for Labour-intensive Sectors:
- India is negotiating greater market access for sectors like textiles, leather, food processing, and toys.
- These sectors should be taxed at a merit rate of 8% instead of the current 5% to avoid the accumulation of input tax credits (ITC).
- Zero import duty and waiver of non-trade barriers for single-use inputs and intermediates in these sectors are recommended.
Proposed GST Structure
- Tax Slabs:
- Consolidation into three main slabs: 8%, 18%, and 40%.
- Merging the current 12% slab into the 18% slab after adjusting rates for specific sectors like textiles and medicines.
- Exemptions and Cesses:
- Phasing out exemptions, retaining only those exempt under the pre-GST regime.
- Reducing items in the 28% slab, including moving durable goods like air conditioners to 18%.
- Simplifying the compensation cess, merging it into a uniform 40% rate for sin goods.
Economic and Social Implications
- Stimulating Growth: The proposed changes would boost labour-intensive manufacturing and investment by reducing business costs.
- Equity and Sustainability: Adjusting duties on items like gold to offset revenue losses from essential goods like cement supports equity and affordable housing.
- Environmental Benefits: Lowering GST on electric vehicles to 18% promotes green initiatives.
Path Forward for GST
- Future Developments:
- GST 3.0 could expand coverage to include sectors like electricity and real estate, impacting factor market reforms.
- A white paper should be prepared for consensus-building among states, to be discussed at the GST council.
In conclusion, the proposed rationalisation aims to simplify the GST, boost economic growth, and demonstrate the effectiveness of cooperative federalism.