Building a better GST

New moves on the GST are progress, but much more is required

- AJAY SHAH, VIJAY KELKAR & ARBIND MODI

The debate on India's goods and services tax (GST) has been stimulated. The leader of the Opposition, Rahul Gandhi, offered a four-point critique: The existing system is overly complex arising from multiple rates; disadvantages micro, small, and medium enterprises (MSMEs); undermines fiscal federalism; and prematurely excludes petroleum products. In response, Prime Minister Narendra Modi has announced a "double Diwali" package of "next-generation GST reforms", promising to simplify the tax structure by collapsing it into two main slabs of 5 per cent and 18 per cent. These developments can be assessed by measuring them against the principles of "the perfect GST" as conceived by its original architects.

The GST rate structure conundrum The seven-slab, multi-rate structure (0.25, 3, 5, 12, 18, 28, and 28+ per cent plus cess) has led to significant economic distortions and compliance challenges. These are very high rates in objective terms.

The call for a single rate correctly identifies this multiplicity as a central problem. The Prime Minister's proposal to streamline the system into a five-slab structure, with a 5 per cent rate for most consumption goods and an 18 per cent rate for general goods and services, is a step toward rationalisation and rate reduction. Nearly 99 per cent of items at 12 per cent will go to 5 per cent, and nearly 90 per cent of items at 28 per cent slab will go to 18 per cent. The 28 per cent slab with cess will be consolidated into a single 40 per cent rate, while the 0.25 per cent and 3 per cent concessional rates will continue to apply to specified high-value items.

This is progress, but it is not the perfect GST. A low single-rate system, a global best practice, is really the only way to go.