The Goods and Services Tax (GST) regime in India is poised for reform in 2025. Union Home Minister Amit Shah is leading efforts to build consensus among states and central ministries. The focus is on overhauling the GST rate structure to simplify it and resolve long-standing contentious issues. A major proposal under consideration is the removal of the 12 per cent tax slab, shifting items either to 5 per cent or 18 per cent slabs. This initiative aims to streamline the tax system but faces resistance due to potential revenue losses and political differences.
Background and Current Context
The GST was implemented in July 2017 as a landmark indirect tax reform. It replaced multiple taxes with a unified system. However, it retained multiple tax slabs – 0, 5, 12, 18, and 28 per cent, plus cesses on luxury and sin goods. This complexity has led to disputes and difficulties in compliance. The 12 per cent slab, introduced to cover a diverse range of goods, has been criticised for complicating the structure. Attempts to rationalise rates have been ongoing for years but stalled due to disagreements between the Centre and states.
Role of the Home Minister in GST Reform
Amit Shah’s involvement marks a strategic move to push reforms through political consensus. Traditionally, GST decisions are managed by the Finance Ministry and the GST Council, which includes state representatives. However, politically sensitive issues and deadlocks have necessitated higher-level intervention. The Home Minister’s engagement aims to bridge divides between BJP-ruled and Opposition states. His role is to facilitate dialogue and build trust for difficult decisions.
Challenges in Rate Rationalisation
Removing the 12 per cent slab involves shifting numerous items across slabs. These include packaged foods, household goods, textiles, and medical supplies. The complexity lies in balancing revenue impact and fairness. The 12 per cent slab contributes about 5-6 per cent of GST revenue, while the 18 per cent slab accounts for 70-75 per cent. Redistribution could cause a revenue loss estimated between Rs 70,000 to 80,000 crore. States fear loss of funds and political backlash. The GST Council requires broad consensus, and decisions could be subject to voting.
Previous Attempts and Future Outlook
The GST Council has discussed rate rationalisation since 2021. Efforts included correcting inverted duty structures in textiles and footwear. A ministerial panel reviewed slabs in early 2024 but retained the 12 per cent slab for the time being. The Group of Ministers (GoM) is examining proposals on 148 items. The next GST Council meeting is expected to revisit these issues. Discussions on lowering rates for health and life insurance premiums remain unresolved. The process is gradual and requires careful negotiation.
Impact on Economy and Taxpayers
Simplifying GST slabs can reduce compliance costs and ease tax administration. Consumers may benefit from clearer pricing. Businesses could face transitional challenges adjusting to new rates. Revenue uncertainty makes states cautious. The reform aims to enhance efficiency, reduce disputes, and improve tax buoyancy. Political will and cooperative federalism will be crucial for success.
Questions for UPSC:
- Point out the challenges and benefits of implementing a unified Goods and Services Tax system in a federal structure like India.
- Critically analyse the role of political consensus in fiscal federalism, with suitable examples from indirect tax reforms in India.
- Estimate the impact of tax rate rationalisation on state revenues and economic growth in India.
- What are the implications of tax rate complexity on compliance and ease of doing business? How can technology aid in addressing these challenges?
