GST Reforms: Home Minister to initiate discussions for agreement on rate adjustments

Previous Discussions: In 2024, the Ministerial panel maintained the 12% bracket despite thorough conversations, seen as contradictory to simplification objectives.

55th GST Council Meeting: Postponed decision on reducing GST on health and life insurance premiums (currently set at 18%).

Two opposing states requested a decrease to 5%.

Decision to alter GST rates on 148 items deferred for additional review.

(2023–24):

• 18% slab: 70–75% of GST earnings.
• 12% slab: 5 to 6%.
• 5% slab: 6–8%.
• 28% slab: 13–15%.

Tax on Goods and Services

The GST was implemented in 2017 through the 101st Constitutional Amendment Act, 2016 as an all-encompassing indirect tax across the nation.

It is a consumption tax based on the destination of goods and services.

It is imposed at every stage, starting from production to final usage.

Tax will be applied solely on value added, and the final consumer will bear the tax burden.

It is collected by the State or the Union Territory in which the consumption occurs. There are three categories:

Central GST (CGST): Imposed by the central government.

State/Union Territory GST (SGST/UTGST): Imposed by States or Union Territories.

Integrated GST (IGST): A tax imposed and gathered by the Center on all supplies of goods and/or services that occur between states.

The Center reconciles finances with the States/UTs by sending the SGST/UTGST share of IGST to the destination state where goods/services were utilized.

Four tax rates for goods and services: 5%, 12%, 18%, and 28%.

Various tax brackets were established since essential goods shouldn't be taxed at the same rate as luxury products.

A cess is imposed at the top tax rate of 28% on luxury, sin, and demerit items.

The funds collected from the cess are allocated to a distinct pool known as the Compensation fund.

The GST Council is an authorized entity established by Article 279A.

It is a national organization that includes the Union Finance Minister as its Chairperson and the Finance Ministers from all States as members.

The members of the GST Council make nearly all decisions regarding GST by consensus.

Exempted Items: GST is applicable to all goods except for alcoholic beverages for human consumption and five petroleum products (common to both the Center and the States): petroleum crude, motor spirit (petrol), high-speed diesel, natural gas, aviation turbine fuel.

Rate Adjustment

A significant long-standing proposal is to remove the 12% bracket to transition to a streamlined three-rate system.

The 12% slab presently encompasses products such as packaged foods (condensed milk, fruit juices), domestic items (furniture, sewing machines), and healthcare products (diagnostic kits, bandages).

Items presently in the 12% bracket would be moved to either:

5% levy (for instance, essential groceries and domestic products),

or 18% of the slab (additional revenue-generating products).

This rationalization seeks to streamline the GST framework, minimize classification conflicts, and rectify inverted duty arrangements.

Difficulties:

Projected revenue reduction of ₹70,000–₹80,000 crore if the 12% tier is eliminated.

Significant opposition from states stemming from worries about revenue reductions and shifts in tax burdens.

Additional Suggested Reforms:

Broaden GST Scope: Incorporate petroleum goods, electricity, and real estate into GST for a more inclusive approach.

Expand the base to lessen the necessity for elevated rates and enhance tax responsiveness.

Enhance GST Adherence & Technological Implementation: Bolster e-invoicing, e-way bills, and GSTN framework.

Utilize artificial intelligence and data analysis to identify tax fraud, counterfeit invoices, and enhance compliance oversight.

Optimize Input Tax Credit (ITC) Process: Facilitate prompt and smooth transfer of ITC to minimize working capital constraints for companies.

Simplify ITC regulations, enhancing their clarity and predictability.

Reinforce GST Council & Cooperative Federalism: Improve transparency and responsibility in the decisions made by the GST Council.

Path Ahead:

There is still discussion about a three-rate GST structure.

The GoM on rate rationalisation had requested additional time to discuss the plan to adjust rates on up to 148 items, which is anticipated to be discussed at the upcoming GST Council meeting.

In addition to lowering rates, the GST's future path aims to simplify the legislation, make compliance easier, and eventually attract more and more taxpayers to the formal economy so that everything functions automatically.