The Goods and Services Tax (GST) framework in India is under renewed focus in 2025. Union Home Minister Amit Shah is engaging with states to build consensus on rationalising GST rates before the next GST Council meeting. This move comes after multiple rounds of discussions failed to reach agreement on simplifying the tax slabs. The aim is to streamline GST slabs and address concerns of states and stakeholders.
Background of GST Rate Structure
India’s GST currently has five tax slabs – 0%, 5%, 12%, 18%, and 28%. These slabs cover a wide range of goods and services. The 12% slab includes packaged foods, household items, and medical supplies but contributes only 5-6% to total GST revenue. The 5% and 18% slabs make up 70-75% of collections. The 28% slab accounts for 13-15%. Experts argue the 12% slab adds complexity without much revenue benefit.
Proposed Changes and Objectives
The key proposal is to reduce the number of slabs from five to four by eliminating the 12% slab. This would simplify taxation and reduce compliance burdens. Products currently taxed at 12% may be shifted to either 5% or 18%. Some high-tax items like air conditioners may see rates lowered from 28%. The objective is to harmonise rates while maintaining revenue stability.
Challenges in Achieving Consensus
GST is a shared tax between the Centre and states, making consensus crucial. Some BJP-ruled states have reservations about proposed changes. Disagreements also exist on taxing services such as online gaming and insurance premiums. Certain states want GST on life and health insurance reduced to 5% or removed. Political and fiscal concerns complicate negotiations.
Role of Compensation Cess and Revenue Implications
The compensation cess, levied on luxury and sin goods, is set to end in March 2025. There are talks of replacing it with a health cess and a clean energy cess. This may require constitutional amendments. States are concerned about revenue losses from rate changes and cess withdrawal. Transparent discussions on revenue impact are essential to secure state support.
Importance of Political Engagement
Union Home Minister Amit Shah’s involvement aims to smoothen relations with states. His experience with sensitive economic issues like disinvestment and food price controls may help build trust. Early consultations with state finance ministers are intended to reduce friction and expedite agreement at the GST Council.
GST Collections and Economic Context
Gross GST collections rose by 9.5% to ₹22.09 lakh crore in FY25. However, growth may moderate in the current year. Rate rationalisation must avoid disrupting tax inflows. A balanced approach is needed to support economic recovery and fiscal health.
Questions for UPSC:
- Taking example of India’s GST reforms, discuss the challenges and benefits of implementing a unified tax system in a federal structure.
- Examine the impact of tax rate rationalisation on state revenues and fiscal federalism in India.
- With suitable examples, discuss the role of political consensus in economic policy reforms and its implications for governance.
- Critically discuss the significance of indirect taxes like GST in India’s economic growth and social equity, and analyse their limitations.
