GST reforms aim to make the tax simpler, better and cheaper

Applying the philosophy behind reductions in income tax burdens announced in the Budget to the Goods and Services Tax, the government has proposed major reforms in rates and slabs to provide relief to key sections of the population while betting on increased economic activity to compensate any revenue loss.

The decision to flip the way governments usually look at taxation – primarily as revenue generation measures – that marked the Budget  has been extended to GST with the proposed reforms centring on farmers, middle class, micro, small and medium enterprises and the socio-economically weak. “The idea is to apply the principle of equity to GST reforms which are intended to be more than just changes in rates,” said a senior official source.

The politico-economic argumentation underpinning the GST reforms is that the changes will provide relief to those who need it and this, it is expected, will reduce the possibility of state governments being overly anxious about any likely loss of revenue. Even on the revenue loss scenario, the finance ministry has done its math over what might be the demand and consumer buoyancy due to reduced rates.

The proposals have been shared with the group of ministers examining rate rationalisation which along with two other GoMs is to meet on August 21-22. The effort, official sources said, was to reduce the costs of inputs and commonly used items. The price of fertilisers and commonly used chemicals are cases in point.

The reductions will be sweeping in line with the “Diwali bonanza” promised by Prime Minister Narendra Modi in his Independence day address on August 15. The government is confident the tight deadline can be met with sources saying that there was no bias in the rationale for GST reforms. “It will be incorrect to jump  to the conclusion that states will face a revenue deficit. The proposals must be discussed by the GOMs and then the GST council,” they said.

The relook at GST will also encompass rationalising an reducing compliances and issues such as duty inversion that are common complaints. Changes to the backend of the GST system have been planned to make the processes of registration smoother and less prone to rejections on technical grounds.

The new GST proposes to do away with the 12% slab and a majority of items on the 18% list will move to the 5% rate. The maximum rate of 40% will be applied sparingly. This would mean a large number of items in which GST is applied will become much more affordable. This includes small and mid-sized passenger cars that is already a growing segment of the auto industry.

The multiple rates were necessary when GST was launched as a maze of central and state levies and duties was done away with. Though some NGOs have claimed that GST burden falls disproportionately on the poor, these calculations do not take into account the pre-GST burdens. In any case, the proposed reforms should be able to counter allegations of inequity.

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