Recent proposals by the Government of India aim to simplify the Goods and Services Tax (GST) structure. The current four-tier system of 5, 12, 18, and 28 per cent may be reduced to two slabs – 5 per cent and 18 per cent. A special rate will remain for sin goods. This reform intends to ease middle-class budgets and stimulate economic growth.
Current GST Structure and Its Impact
India’s GST currently has four main tax rates. This complexity increases compliance costs and dampens consumption. Many developed countries have simpler GST systems with one or two rates between 5 and 15 per cent. The existing multi-tier system raises prices, especially for daily use items, thereby affecting demand and business competitiveness.
Proposed GST Rate Changes
The proposal suggests reducing slabs to just two main rates – 5 per cent for essential goods and 18 per cent for other goods and services. This will lower taxes on textiles, apparel, agricultural machinery, automotive components, healthcare, insurance, FMCG, and retail sectors. Sin goods will continue to have a separate higher tax.
Multiplier Effect of Reduced GST
Lower GST rates will reduce logistics and compliance costs. This will increase demand for price-sensitive goods. Higher consumption can lead to job creation. The reform is expected to improve India’s export competitiveness, especially amid global trade disruptions like tariffs from the US.
Impact on Textile and Apparel Industry
India is the world’s largest cotton producer. The textile sector employs 40 million people and is export-oriented. Currently, apparel below ₹1,000 attracts 5 per cent GST, and above ₹1,000, 12 per cent. Value-added services like marketing and logistics attract 18 per cent GST, causing inverted duty issues. This raises costs by up to 7 per cent, hurting export competitiveness. Delays in input tax credit refunds further burden the sector.
Challenges for Aluminium Automotive Components
Aluminium automotive parts face high GST at 28 per cent and customs duties above 7.5 per cent on raw aluminium. This raises production costs and lowers trade margins. Chinese manufacturers receive subsidies of 16 per cent, making Indian products less competitive globally. The GST reform could ease these pressures.
Benefits for Healthcare and FMCG
Health insurance costs are expected to fall, benefiting the 400 million Indians without coverage. Lower GST on FMCG products will ease expenses for lower and middle-income households. Overall, the reform aims to boost consumption, employment, and economic growth.
Questions for UPSC:
- Point out the economic effects of simplifying indirect tax systems like GST on developing countries.
- Critically analyse the role of tax reforms in enhancing export competitiveness with suitable examples from India and other countries.
- Estimate the impact of tariff and non-tariff barriers on domestic manufacturing sectors and how tax policy can address these challenges.
- What are the challenges in implementing input tax credit mechanisms in GST systems? How can coordination between ministries improve tax compliance and refunds?
