Need for GST Rate Rationalisation in India

Current GST Rate Structure

The Goods and Services Tax (GST) framework in India features four primary tax slabs: 5%, 12%, 18%, and 28%. Additionally, specific goods attract special rates, such as sin goods and luxury items, which incur additional cesses. This multi-tiered structure often results in complexities, creating compliance challenges for businesses.

Why Is Rate Rationalisation Needed?

The need for rate rationalisation arises from several factors:

• Complexity: The existence of multiple tax slabs complicates compliance for businesses.
• Economic Changes: Shifts in consumption patterns necessitate adjustments to rates to align with current industry dynamics.
• Revenue Generation: Simplifying rates may help reduce tax evasion, widen the tax base, and increase government revenue.
• Encouraging Growth: Lowering rates on essential and intermediate goods can boost demand and stimulate economic activity.

Potential Benefits

• Ease of Compliance: A simpler rate structure can reduce disputes and lessen compliance burdens.
• Boost to Economy: Rationalisation can lower costs for businesses, consequently encouraging consumption.
• Fairer Taxation: Ensures uniform taxation for items within the same category.
• Higher Revenue Collection: A streamlined structure can enhance efficiency and improve tax compliance.

Challenges

• Revenue Risks: Reducing rates may lead to temporary revenue shortfalls.
• Political Consensus: States might resist changes that impact their share of GST revenue.
• Inflationary Pressures: Increasing rates on certain items could raise prices for consumers.

Progress So Far

The GST Council has periodically revised rates since the GST's implementation in 2017. Key measures include:

• Lowering rates for essential goods, such as medicines and fertilizers.
• Streamlining taxes on similar items to avoid classification disputes.
• Ongoing discussions to rationalise rates for approximately 150 items.

Revenue Neutrality

The concept of revenue neutrality ensures that the government collects the same revenue despite rate adjustments. Initially set at 15.3%, the revenue-neutral rate (RNR) has decreased to around 11%. Experts suggest that achieving complete neutrality may not be immediately feasible, considering the evolving nature of the GST regime.

Frequently Asked Questions (FAQs)

Q1. Why is GST rate rationalisation necessary?
Answer: GST rate rationalisation is essential to simplify compliance for businesses, align tax rates with current economic conditions, and enhance government revenue by reducing tax evasion.

Q2. What are the main benefits of rationalising GST rates?
Answer: The main benefits include easier compliance, lower business costs, fairer taxation, and improved revenue collection for the government.

Q3. What challenges does GST rate rationalisation face?
Answer: Key challenges include potential revenue shortfalls, political resistance from states, and inflationary pressures on consumer prices due to rate adjustments.

Q4. How has the GST Council progressed since 2017?
Answer: Since 2017, the GST Council has revised rates, lowered taxes on essential goods, and worked towards rationalising rates for around 150 items to reduce compliance issues.

Q5. What is revenue neutrality in the context of GST?
Answer: Revenue neutrality refers to the government's ability to maintain the same revenue levels despite changes in tax rates. The initial rate of 15.3% has decreased to approximately 11% over time.

UPSC Practice MCQs

Question 1: What are the primary GST tax slabs in India?
A) 4%, 10%, 15%, 25%
B) 5%, 12%, 18%, 28%
C) 6%, 14%, 20%, 30%
D) 3%, 9%, 17%, 27%
Correct Answer: B

Question 2: What is a benefit of GST rate rationalisation?
A) Increased compliance burden
B) Higher costs for businesses
C) Uniform taxation across similar items
D) More complex tax structure
Correct Answer: C

Question 3: What challenge is associated with reducing GST rates?
A) Enhanced political support
B) Temporary revenue shortfalls
C) Decreased consumer prices
D) Simplified compliance
Correct Answer: B

Question 4: What is the current revenue-neutral rate (RNR)?
A) 5%
B) 10%
C) 15.3%
D) 11%
Correct Answer: D

Question 5: Why is revenue neutrality important?
A) To increase tax rates
B) To maintain stable government revenue
C) To complicate tax structures
D) To reduce tax compliance
Correct Answer: B