GST Rate Rationalisation: A Move Towards Two-Primary-Slab Structure

 

GST Rate Rationalisation: A Move Towards Two-Primary-Slab Structure

By Suryavanshi IAS

The Goods and Services Tax (GST), India's most significant indirect tax reform, is poised for its next major overhaul. A Group of Ministers (GoM) constituted by the GST Council has accepted the Union government's proposal for a massive rationalisation of tax slabs. This move, hinted at by the Prime Minister as a "Deepavali gift," aims to simplify the tax structure and reduce the burden on consumers. For UPSC aspirants, this is a critical development in the Economic and Fiscal Policy segment of the GS Paper III syllabus.

This blog will break down the proposal, its benefits, revenue implications, and crucially, link it to previous year questions to highlight its importance for the exam.

The Proposed New Structure: From Seven to Four (Effectively Two)

The current GST regime is a multi-tiered structure with rates of 0.25%, 3%, 5%, 12%, 18%, and 28%, plus a compensation cess on certain items in the top slab.

The Union government's proposal seeks to streamline this into a more simplified four-rate structure:

1. ~1% slab: This will combine the current 0.25% and 3% slabs. It will cover items like diamonds, precious stones, and jewellery.

2. 5% slab: This will become a major slab for common-use items.

3. 18% slab: This is proposed to be the other primary slab, capturing a wide range of goods and services.

4. 40% slab: This will replace the 28% slab plus cess for specific "sin" goods and services.

The Key Thrust: The central idea is to have two preferred rate slabs—5% and 18%—where the vast majority of goods and services will be categorized.

• 99% of items currently in the 12% slab will be moved down to the 5% slab.

• 90% of items in the top 28% slab will be moved down to the 18% slab.

• Only a handful of demerit goods like tobacco, cigarettes, and online gaming will be taxed at the new higher rate of 40%.

How Will Consumers Benefit?

The primary benefit for the common consumer will be a reduction in prices on a wide range of everyday and mid-tier goods. This will effectively increase disposable income and boost consumption.

1. Reduced Prices on Daily Essentials: Items like soap, toothpaste, and other toiletries, currently taxed at 18%, are expected to move to the 5% slab, making them cheaper.

2. Affordability of Consumer Durables: Non-luxury cars, air conditioners, and refrigerators, which currently attract a steep 28% tax plus a compensation cess, are proposed to be taxed at 18%. This could significantly reduce their retail prices.

3. Lower Effective Tax Rate: According to the State Bank of India's research wing, the average GST tax rate is projected to fall to 9.5% by 2026-27 from 11.6% in 2019. This indicates a broader reduction in the tax burden across the economy.

Revenue Implications: A Manageable Dent?

A rationalisation of this scale will inevitably lead to a short-term revenue loss for both the Union and State governments.

• Estimated Revenue Hit: Economists project a revenue foregone in the range of ₹1.1 to ₹1.8 lakh crore.

• Sharing the Burden: This loss is expected to be borne equally—50% by the Centre and the remaining 50% divided among all the States.

How will the government make up for this loss?

1. Wider Tax Base & Improved Compliance: The simplification of the structure is expected to bring more entities into the tax net and improve compliance, thereby increasing revenue over the medium to long term. A simpler system reduces classification disputes and evasion.

2. RBI Dividend & Fiscal Buffer: The Union government received a record ₹2.69 lakh crore dividend from the Reserve Bank of India (RBI) for FY25. Even if such a surplus is not repeated, it provides a fiscal buffer to absorb the shock. The Centre can manage this through its budgetary calculations.

3. Compensation Mechanism for States: States are more concerned about the revenue loss. Kerala Finance Minister K.N. Balagopal, a member of the GoM, has already suggested that the GST Council must institute a mechanism to compensate States for any losses arising from this rationalisation. This will be a key point of discussion in the upcoming Council meeting.

Connecting to the UPSC Syllabus

This development is a live case study for multiple segments of the UPSC syllabus:

GS Paper III: Indian Economy

• Government Budgeting: Implications of tax revenue changes on fiscal deficit.

• Fiscal Policy: GST as a tool for indirect taxation; its impact on different sectors and income groups.

• Resource Mobilization: Widening the tax base, improving compliance, and the trade-off between tax rates and revenue collection (Laffer Curve concept).

• Cooperative Federalism: The role of the GST Council as a federal body balancing the interests of the Centre and States.

Prelims: Economic and Social Development

• Current events of national and international importance.

• Basic concepts of economics and public finance.

Previous Year Questions (PYQs) in UPSC

Understanding the type of questions asked on GST is crucial for preparation.

1. With reference to the Indian economy, consider the following statements: (2022)

1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.

2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.

3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.

Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (c) 1 and 3 only
Explanation: While this is about exchange rates, it tests understanding of inflation and competitiveness. GST, as an indirect tax, influences domestic inflation. A rationalisation that lowers rates can help control inflation, affecting REER/NEER dynamics.

2. Which of the following factors/policies were affecting the price of rice in India in the recent past? (2020)

1. Minimum Support Price

2. Government’s trading

3. Government’s stockpiling

4. Consumer subsidies
   Select the correct answer using the code given below:
   (a) 1, 2 and 4 only
   (b) 1, 3 and 4 only
   (c) 2 and 3 only
   (d) 1, 2, 3 and 4
   Answer: (d) 1, 2, 3 and 4
   Explanation: This question highlights how government policy affects prices. GST is a massive policy tool that directly impacts the price of all goods and services, making this topic highly relevant.

3. Consider the following items: (2018)

1. Cereal grains hulled

2. Chicken eggs cooked

3. Fish processed and canned

4. Newspapers containing advertising material
   Which of the above items is/are exempted under GST (Goods and Services Tax)?
   (a) 1 only
   (b) 2 and 3 only
   (c) 1, 2 and 4 only
   (d) 1, 2, 3 and 4
   Answer: (c) 1, 2 and 4 only (As per the GST laws at that time)
   Explanation: This question directly tests knowledge of GST exemptions. The current proposal to change slabs makes understanding the rationale behind which items are placed in which slab extremely important.

Conclusion and Way Forward

The proposed GST rate rationalisation is a bold step towards achieving the original vision of a "One Nation, One Tax." It aims to simplify compliance, reduce the tax burden on consumers, and boost consumption-led growth.

The upcoming GST Council meeting on September 3-4 will be crucial, as it will debate these proposals. The main challenge will be to build a consensus among states on the revenue compensation mechanism. For a UPSC aspirant, tracking the outcome of this meeting is essential to understand the evolving nature of fiscal federalism and economic policy in India.