Why in News?
The Group of Ministers (GOM) appointed by the Goods and Services Tax (GST) Council to look into the rationalisation of rates in GST says it has accepted the Union government’s proposals on how to go about the process.
UPSC Relevance
Prelims, GS3, Budgeting
PYQ :
2018 Prelims
With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
- It is introduced as a part of the Income Tax Act.
- Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
2024
Consider the following items:
- Cereal grains hulled
- Chicken eggs cooked
- Fish processed and canned
- Newspapers containing advertising material
Which of the above items is/are exempted under GST (Goods and Services Tax)?
1 only
2 and 3 only
1, 2 and 4 only
1, 2, 3 and 4
Mains 2020 – 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?
Why Next-generation Reforms to GST?
Suggested Reforms
Group of Ministers (GoM) on Rate Rationalization
- To move from the current four-tier structure (5%, 12%, 18%, and 28%) to a simpler two-rate structure. This would typically include a 5% rate for essential goods and an 18% rate for all other standard goods and services.
- It has also recommended a new higher rate, potentially 40%, for “sin goods” and ultra-luxury items.
Group of Ministers (GoM) on System Reforms
- To implement pre-filled GST returns to reduce manual errors and mismatches.
- They also recommended seamless, tech-driven, and time-bound registration for businesses, especially MSMEs, and automated refunds for exporters and those with an inverted duty structure.
Public Accounts Committee (PAC)
- They have also raised concerns about the decline in indirect tax revenue and recommended a more efficient refund system with clear timelines and a dedicated grievance redressal mechanism.
Other Reforms
- Correcting the inverted duty structure : In some cases, the tax on raw materials is higher than the finished product. This needs to be corrected. This reform would reduce the accumulation of Input Tax Credit (ITC) for businesses and boost domestic manufacturing.
- Inclusion of Petroleum and Other Products: One of the long-standing recommendations is to bring petroleum products, electricity, and real estate under the GST ambit to ensure a more comprehensive and seamless tax system. While a politically sensitive issue, committees have consistently advocated for it to remove the cascading effect of taxes on these vital sectors.
Recent Proposed Reforms
Reducing the Slabs and Rates
- The GST currently has at least 7 different rates: 0.25%, 3%, 5%, 12%, 18%, 28%, and a compensation cess levied on the items in the 28% slab.
- The Union government proposed to reduce these to 4:
- a rate of less than 1% for the items currently in 0.25% and 3% (diamonds, semi-precious stones, jewellery, and precious metals), 5%, 18%, and 40%.
- As per the proposal, 99% of the items currently in the 12% slab would move to 5%, and 90% of the items in the 28% slab would move to 18%.
- A higher tax rate of 40% for ‘sin’ goods and services such as tobacco, cigarettes, and online gaming.
- Vast majority of items would be in just the two slabs of 5% and 18%.
What does this mean for the common consumer?
- According to a calculation by the State Bank of India’s economic research wing, if the proposals are accepted by the GST Council, the average tax rate under GST is expected to fall to 9.5% by 2026-27, from a notional rate of 14.4% in May 2017 and 11.6% as of September 2019.
| Item Category / Name | Current GST Rate | Proposed GST Rate | Remarks | |
Non-luxury cars | 28% + Compensation Cess | 18% | Reduce to 18% | |
Air Conditioners (ACs) | 28% + Compensation Cess | 18% | ||
Refrigerators (Fridges) | 28% + Compensation Cess | 18% | ||
| Common food items | Sugar | 5% | 5% | No Change |
| Tea | 5% | 5% | ||
| Coffee | 5% | 5% | ||
| Edible oil | 5% | 5% | ||
| Spices | 5% | 5% | ||
Lifesaving drugs | 5% | 5% | ||
Apparel (< ₹1,000) | 5% | 5% | ||
| Common Use Items | Soap | 18% | 5% | Reduce to 5% |
| Toothpaste | 18% | 5% | ||
| Other Toiletries | 18% | 5% | ||
Impact on Revenues
- According to economists, the loss of GST revenues could range between 21.1 lakh crore and 21.8 lakh crore, to be half borne by the Centre, and half divided across the States.
- To put this amount in context, the Reserve Bank of India (RBI) transferred a record dividend of ₹2.69 lakh crore to the government for 2024-25. Thus, the Union government will be able to quite comfortably absorb the revenue hit from the GST rate cuts.
- States’ Concerns – Kerala Finance Minister K.N. Balagopal, a member of the GoM on rate rationalisation, said the GoM has suggested to the GST Council that if the States incur any losses due to this rationalisation, there should be a mechanism to compensate them.
About GST
Constitutional Provisions
- 101st Constitutional Amendment Act, 2016: Enabled the introduction of GST in India, effective July 1, 2017.
- Article 246A: Empowers both Parliament and State Legislatures to make laws on GST, Parliament has special powers for inter-state supplies.
- Article 269A: Provides for the levy and collection of GST on inter-state trade and revenue sharing. IGST is levied on inter-state transactions, including imports.
- Article 279A: Establishes the GST Council, outlines its composition, powers, and procedures for operation including recommendations on tax rates, exemptions, and other matters.
- Article 265: No tax can be levied or collected except by authority of law.
Features of Goods and Services Tax (GST)
- Single Indirect Tax: GST is a comprehensive indirect tax replacing various Central and State taxes like VAT, excise duty, service tax, luxury tax, entry tax, etc. It brought a unified tax system for the whole country.
| Category | Taxes/Subsumed Items |
|---|---|
| Central Taxes Subsumed under GST | Central Excise Duty (except on select petroleum products) |
| Additional Excise Duties | |
| Excise Duty on Medicinal and Toilet Preparations | |
| Service Tax | |
| Additional Customs Duty (Countervailing Duty – CVD) | |
| Special Additional Duty of Customs (SAD) | |
| Central Surcharges and Cesses (related to supply of goods and services) | |
| Central Sales Tax (CST) (levied by the Centre and collected by the States) | |
| State Taxes Subsumed under GST | State Value Added Tax (VAT) / Sales Tax |
| Entertainment Tax (except that levied by local bodies) | |
| Luxury Tax | |
| Entry Tax (all forms) / Octroi | |
| Purchase Tax | |
| Taxes on lottery, betting, and gambling | |
| State Surcharges and Cesses (related to supply of goods and services) | |
| Taxes Not Subsumed Under GST | Basic Customs Duty (BCD) |
| Excise Duty and VAT on Petroleum Products | |
| Taxes and duties on Alcohol for Human Consumption | |
| Stamp Duty and Property Tax | |
| Toll Tax and Road Tax |
- Multi-Stage & Destination-Based: GST applies at every stage of value addition—from production to the point of consumption. Tax is collected at the final point where goods/services are consumed, not their origin.
- Dual Structure: GST is levied as Central GST (CGST) and State GST (SGST) for intra-state supplies and Integrated GST (IGST) for inter-state supplies. IGST is collected by the center and distributed between center and state.
- Input Tax Credit: Businesses can claim credit for the tax paid on inputs, preventing double taxation and reducing overall tax liability.
- Threshold Exemption: Small businesses with turnover below ₹20 lakh (₹10 lakh for special states) are exempted from GST.
- Composition Scheme: Simplifies tax compliance for small businesses, allowing them to pay tax at a fixed rate of turnover on an annual basis.
- Online Compliance: All GST filings and payments are done via the GSTN portal, enhancing transparency and digital record-keeping.
- Anti-Profiteering Measures: The National Anti-Profiteering Authority (NAA) ensures businesses pass on GST benefits to consumers.
- Sector-Specific Exemptions: Sectors like health, education, and food grains are exempt or taxed at lower rates and a few items (like petroleum and alcohol) are currently excluded.
GST Council: Role & Structure
Composition
- Chairperson: The Union Finance Minister of India.
- Members:
- The Union Minister of State in charge of Revenue or Finance.
- The Minister in charge of Finance or Taxation, or any other Minister nominated by each state and union territory with a legislature.
- Permanent Invitee (non-voting): The Chairperson of the Central Board of Indirect Taxes and Customs (CBIC).
Voting
- Decisions are made by a majority of not less than three-fourths of the weighted votes of the members present and voting. The voting weights are strategically assigned to balance the power between the Centre and the states:
- Central Government: The Centre’s vote has a weight of one-third (⅓) of the total votes cast.
- State Governments: The combined votes of all state governments have a weight of two-thirds (⅔) of the total votes cast.
- A quorum for a meeting is one-half of the total number of members. This voting structure ensures that no single entity can make a decision independently, promoting a sense of cooperative federalism.
Powers and Functions
- Tax Rates: Recommending the GST rates, including the floor rates with bands, for various goods and services.
- Exemptions: Deciding which goods and services should be subjected to or exempted from GST.
- Laws and Principles: Formulating Model GST Laws, principles of levy, and the principles that govern the place of supply.
- Threshold Limits: Setting the turnover threshold below which businesses are exempt from GST registration.
- Special Provisions: Recommending special provisions for certain states or categories of goods and services, such as a special rate to raise additional resources during a natural calamity or disaster.
- Dispute Resolution: Recommending a mechanism for resolving disputes between the Centre and states arising out of the recommendations of the GST Council. Indias has constituted GSTAT – GST Appellate Tribunal for the same.
These recent reforms planned for Deepavali as announced by PM Modi from Red Fort, seek to strengthen the “One Nation, One Tax” vision, improve GST efficiency, reduce litigation, help businesses grow, and support India’s economic ambitions.
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