Why in the News?

Most states appear to be opposed to altering the current five primary GST rate slabs: 0%, 5%, 12%, 18%, and 28%.

About Goods and Service Tax (GST):

The Goods and Services Tax (GST) in India was introduced by the Constitutional (One Hundred and First Amendment) Act of 2017. It is a unified tax system that replaced multiple indirect taxes levied by both the Central and State Governments.
Under GST, the Central (CGST) and state government (SGST) share the authority to levy and collect taxes on goods and services. In the case of Inter-state transactions, Integrated GST (IGST) is applicable.

Essential Features of GST

Multiple Tax Levels: India’s GST system has multiple tax rates, with four primary tax rates (5%, 12%, 18%, and 28%). Additionally, there is a “zero rate” for certain essential goods and services (e.g. exports).
One Nation, One Tax: GST is based on the principles of value-added tax and applies to the supply of goods and services across the nation. It brings uniformity in the tax structure across India, eliminating the cascading effect of taxes.
Destination-Based Tax: This means that the revenue generated from GST is collected by the state where the goods or services are consumed, rather than where they are produced.
Eliminating Cascading Effect: Under the Indian GST system, businesses can claim input tax credit for the GST they paid on their purchases. This ensures that taxes are levied only on the value added at each stage of the supply chain.
Sector-specific Exemptions: Certain sectors, such as healthcare, education, and basic necessities like food grains, are either exempted from GST or have reduced tax rates to ensure affordability and accessibility.
Threshold Exemption: Small businesses with a turnover below a specified threshold (currently, it is 20 lakhs: supplier of both goods & services and 40 lakhs: for supplier of goods (Intra–State) in India) are exempt from GST.

Present Challenges in GST Rates

Complexity and Confusion: The existence of multiple GST slabs creates confusion for businesses and consumers alike. Different rates for similar items lead to complications in compliance and classification, resulting in litigation and disputes.
- For instance, the GST on cement is 28%, while essential items like milk are exempt, yet products derived from milk, such as skimmed milk powder, are taxed at 5%.
Anomalies in Taxation: There are notable inconsistencies in the application of GST rates. For example, the taxation of medical and life insurance premiums at 18% is seen as burdensome for individuals seeking financial protection against uncertainties.

Need to simplify the current GST Slabs

Rationalization Proposal: There is a growing consensus among industry experts and some government officials that the GST structure should be simplified to a maximum of three slabs.
- This would not only streamline compliance but also reduce the administrative burden on businesses and the government alike.
Economic Stimulus: Simplifying GST rates could potentially stimulate economic activity by lowering indirect tax burdens, encouraging consumption, and ultimately leading to higher tax revenues.

Why are states resisting?

Fear of Revenue Loss: Many states are apprehensive about the implications of changing the GST structure, fearing that it might lead to a decrease in their revenue streams.
Political Considerations: The political landscape also plays a role in the resistance to change. With upcoming elections and the need to maintain fiscal health, state governments may prioritize short-term revenue stability over long-term structural reforms.

Way forward:

Phased Implementation: Start by introducing pilot programs in select states or sectors to test the impact of GST simplification. This approach can help address specific concerns and refine the model before a nationwide rollout.
Revenue Protection Schemes: Develop robust mechanisms to compensate states for any potential revenue losses during the transition. This could involve a formula-based compensation fund or a temporary revenue guarantee.

Mains PYQ:

Q Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions? (2020)

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