Major Overhaul of India’s GST Aims for Simplicity
India’s Goods and Services Tax (GST) is on the verge of its most significant reform yet, eight years after its introduction. The changes are designed to simplify the complex tax system and ease the burden on businesses and consumers.
Key Proposed Changes
The current four-tier tax structure (5%, 12%, 18%, and 28%) is set to be streamlined into just two slabs: 5% and 18%. This move is expected to simplify pricing and reduce compliance issues for businesses.
Additionally, a new 40% tax rate will be introduced for a short list of luxury or “sin” goods. The complex and often confusing compensation cess, which was meant to protect states from revenue loss, is also proposed to be phased out by next year.
The reform will bring relief to specific sectors, such as the automobile industry, by replacing the cumbersome 28% slab plus cess with a single, simplified rate. The entire system is also getting a technological upgrade, with plans for automated registration and refund processing for small businesses and start-ups, aiming to cut down on red tape and harassment.
For consumers, these changes could mean lower prices on a wide range of goods, from everyday essentials to electronics and appliances, as many items are expected to shift to the lower tax brackets.
The Unfinished Business: Fuel and Alcohol
Despite these sweeping reforms, a key issue remains unaddressed: the exclusion of petroleum products and alcohol from the GST framework.
These items were kept out initially due to states’ concerns over losing significant revenue. Currently, states collect a large portion of their income from taxes on these products, and they fear that including them in GST would reduce their financial autonomy.
The exclusion, however, creates a major problem for businesses. It disrupts the Input Tax Credit (ITC) system, which allows companies to claim a credit on taxes paid on business expenses. Since fuel and alcohol are not under GST, businesses cannot claim ITC on them, leading to a cascading effect of “tax on tax” and increasing operational costs.
The article suggests that with GST collections consistently rising, it’s time for the central and state governments to bite the bullet and bring these two major segments into the fold. This final step is seen as crucial for the GST to truly become a seamless, “next-generation” tax system.