Prof D Mukherjee
The Goods and Services Tax (GST) in India, implemented on July 1, 2017, is a comprehensive indirect tax levied on the supply of goods and services. GST was divided into four main tax slabs: 5%, 12%, 18%, and 28%. The 28% slab, which represents the highest GST rate, is reserved for luxury items, demerit goods, and services deemed non-essential. Items taxed at the highest GST rate of 28% include luxury cars, premium motorcycles, aerated drinks, tobacco products, cigarettes, pan masala, and certain consumer durables such as air conditioners, refrigerators, washing machines, and televisions larger than 32 inches. Additionally, items like cement, high-end watches, and fireworks also fall under this category. The rationale behind this high tax rate is to discourage the consumption of these goods and to generate additional revenue for the government. This approach is aligned with the principle of taxing luxury goods at higher rates to promote equity and curb extravagance. However, this high GST rate has been a topic of debate, as it impacts consumer demand and the profitability of businesses in these sectors. The government periodically reviews GST rates to strike a balance between revenue generation and economic growth, considering inputs from various stakeholders.
The GST is a significant reform in India’s indirect tax regime, intended to unify the country’s market and promote ease of doing business. However, the current GST structure, with rates currently varying from 5% to over 31%, has created discrepancies and discouragement among consumers, particularly in key sectors like infrastructure, insurance, healthcare, and consumer durables. High GST rates on essential and everyday items such as air conditioners (28%), cement (28%), car tyres (28%), dishwashers (28%), small cars (29%), and motorcycles with 350cc engines (31%) significantly impact consumer participation and market growth. Rationalizing and customizing GST rates can be a strategic move to boost sales and broaden the consumer base, particularly among middle and lower-middle-income groups. These groups form the backbone of the consumer market but are often price-sensitive. High GST rates on essential goods and services reduce their purchasing power and discourage consumption, thus hampering market expansion and economic growth. Reducing and rationalizing GST rates can stimulate demand by making goods and services more affordable. For example, lowering the GST on air conditioners and small cars can make these products accessible to a larger segment of the population, leading to increased sales volumes. Increased affordability can also drive the uptake of insurance and healthcare services, which are crucial for socio-economic development.
Several studies highlight the positive impact of tax rationalization on market expansion and fiscal revenue. Reducing GST rates could substantially increase compliance and widen the tax base. Lower tax rates incentivize businesses to register under GST, thus boosting overall tax revenue. Seminal research by the International Monetary Fund (IMF) supports the idea that simplifying and rationalizing tax rates can boost economic activity. The IMF report noted that countries with simpler tax structures tend to have higher compliance rates and broader tax bases, leading to increased revenue collection. Similarly, a report by Deloitte indicated that high GST rates on consumer goods suppress demand and limit market growth. The report advocated for a more uniform and lower GST rate structure to enhance market participation and drive economic growth. Rationalizing GST rates can bring buoyancy to industrial and commercial activities across the economy. Making goods and services more affordable increases demand, leading to higher production and sales. This, in turn, stimulates investment and job creation, contributing to overall economic growth. Additionally, a broader tax base due to increased market participation can enhance fiscal revenue. More businesses and consumers in the tax net result in higher GST collections, even at lower rates. This dual benefit of increased market activity and higher tax compliance creates a sustainable revenue model for the exchequer.
The Covid-19 pandemic has significantly impacted the global economy, and India is no exception. Although recovery has begun, it remains uneven, with certain sectors still lagging. High GST rates are a primary obstacle, inflating the cost of goods and services, making them less accessible, and stifling demand. The GST Council’s initiative to rationalize and customize rates can stimulate the industrial ecosystem’s full recovery. High GST rates disproportionately impact middle and lower-middle-income consumers, reducing their purchasing power and consumption. Rationalizing GST rates on everyday items like air conditioners, cement, car tyres, and household appliances can make these products more affordable, encouraging broader market participation. For instance, reducing GST on two-wheelers, essential for daily commuting in many parts of India, can significantly boost sales. Similarly, lowering GST on healthcare services can improve accessibility, enhancing public health and productivity. Rationalizing GST rates can also boost industries still struggling from the pandemic’s effects. Lowering GST on raw materials and essential goods can reduce production costs, allowing industries to operate more efficiently and competitively, leading to increased production, higher sales, and more job creation. This can generate employment, crucial for economic recovery. By easing the tax burden on industries, the GST Council can foster a favourable business environment, encouraging investment and expansion, ultimately reducing the high unemployment rates since the pandemic
Research consistently supports the benefits of tax rationalization. A study by the Confederation of Indian Industry (CII) found that reducing GST rates could lead to a significant increase in consumer demand, thereby boosting sales and tax revenues. Another study by PricewaterhouseCoopers (PwC) highlighted that simplifying the tax structure could enhance compliance and broaden the tax base, leading to sustainable revenue growth. The GST Council’s rationalization and customization initiative is not only timely but essential for revitalizing India’s industrial and economic landscape. By addressing the high GST rates that burden both consumers and industries, the Council can stimulate demand, enhance consumer purchasing power, support industrial recovery, and create jobs. The dual benefits of increased market activity and higher tax compliance can lead to a more dynamic and inclusive economy, ensuring sustainable economic growth and fiscal stability. This initiative promises to be a game-changer, bringing buoyancy to industrial and commercial activities and paving the way for a robust post-pandemic recovery. Since the rollout of GST in India, rationalization of rates has been a pending and much-needed reform.
The Ministry of Finance should now take a sincere and proactive approach to bring the states into confidence, emphasizing that the compensation cess, initially designed as a temporary measure, was essential during the Covid-19 crisis but should not be a long-term fixture. The original provision of 14% compensation was a protective measure intended for five years, extended due to the unforeseen pandemic. It is now time for the GST Council to frame a win-win strategy that benefits both the central and state governments, while also addressing the needs of the economy and consumers. The Ministry of Finance should ensure that states understand the necessity of transitioning away from compensation cess. This requires transparent communication and collaboration. The states should be reassured that while the compensation cess was crucial for maintaining fiscal balance during the pandemic, its continuation is not sustainable. The central government should emphasize that rationalizing GST rates will ultimately lead to a more stable and robust revenue system, benefiting all stakeholders.
A pragmatic approach may be adopted to impose higher cess on non-essential and harmful items such as gutkha, pan masala, and sugary soft drinks. This strategy serves a dual purpose: it can deter consumption of these items, promoting public health, and it can generate additional revenue without burdening essential goods and services. By carefully selecting items for higher cess, the GST Council can create a balanced approach that addresses revenue needs while minimizing adverse impacts on essential sectors. The central and state governments must recognize that GST rationalization, despite potential short-term challenges, is crucial for long-term economic benefits. Lowering GST rates on essential goods can boost consumer demand, enhance market participation, and stimulate economic growth. Rationalized rates can lead to increased compliance, as businesses and consumers find the tax structure more reasonable and manageable.
It is an imperative to acknowledge that GST rationalization may create challenges in certain sectors. For example, sectors that have become accustomed to higher GST rates might face initial revenue shortfalls. However, a well-planned transition with targeted support measures can mitigate these challenges. The government can provide temporary relief or incentives to sectors that might be adversely affected, ensuring a smoother adjustment period. Several empirical studies support the benefits of GST rate rationalization. A report by the World Bank highlighted that countries with a simplified tax structure tend to experience higher economic growth and improved tax compliance. The National Institute of Public Finance and Policy (NIPFP) also found that rationalizing GST rates could lead to a significant increase in the tax base, enhancing overall revenue collection. Rationalizing GST rates is a critical reform that cannot be delayed any further. The Ministry of Finance, in collaboration with state governments, should take decisive action to implement this reform. By building consensus, strategically imposing cess on non-essential items, and addressing sector-specific challenges, the GST Council can create a balanced and effective tax system. The long-term benefits of GST rationalization include enhanced consumer purchasing power, increased market participation, higher compliance, and ultimately, a more dynamic and inclusive economy. Immediate action on GST rationalization is imperative for ensuring sustainable economic growth and fiscal stability, paving the way for a prosperous post-pandemic recovery.
(The author is a Bangalore based Educationist and Management Scientist)
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