Tax cuts, tight belts

Simplified GST slabs bring relief to consumers, but risk straining state finances and federal harmony

- BY LEKHA CHAKRABORTY

THE GOODS AND Services Tax Council's recent decisions have sparked intense debate among states, with many expressing concerns about potential revenue losses thanks to new tax slabs. States fear they could lose a significant portion of their receipts: estimates suggest the rate rationalisation could cost around ₹48,000 crore. Revenue Secretary Arvind Shrivastava noted the new tax regime would result in tax buoyancy. Yet several state finance ministers have voiced deep concerns about the long-term fiscal sustainability of the structure. Questions have also been raised about the timing of indirect-tax reforms and their efficacy in neutralising the effects of Donald Trump's tariff hikes.

Since its implementation in 2017, the GST has been a game-changer for India's economy. It replaced a complex labyrinth of central and state levies, aiming to create a unified national market and boost growth. It sought to preempt the cascading effects of taxation by avoiding tax at multiple intermediate stages and taxing a commodity only at the final stage.

The GST Council, comprising representatives from the Centre and the states, was tasked with deciding tax rates, exemptions and related matters. To put the issue into perspective: when GST was introduced it had four slabs—5 per cent, 12 per cent, 18 per cent and 28 per cent. The structure was designed to be revenue-neutral so that neither the Centre nor the states lost out because of the transition. States were provided GST compensation at a 14 per cent revenue-neutral rate during the transitory phase to make up for shortfalls.

However, the multiplicity of tax rates persisted and affected ease of doing business. Many countries operate a single GST rate; Union Finance Minister Nirmala Sitharaman has, however, ruled this out for India, noting that “hawai chappal and Benz car cannot have the same GST rate.”