What guides the new GST reforms exercise

On the occasion of the 79th Independence Day, Prime Minister Narendra Modi, emphasised the importance of undertaking the next generation of reforms in the Goods and Services Tax (GST) regime, keeping the interests of the common man at the fore.

- Sanjay Kumar Agrawal

The reforms recently approved by the 56th GST Council are a watershed moment in the evolution of India's indirect tax system.

The new GST reforms rest on three interlinked pillars: Structural reforms, rate rationalisation, and ease of living for taxpayers.

In designing structural reforms, attention was paid to bringing down the number of rate slabs and reduce tax uncertainty. Ideally, goods and services should be charged at a standard rate, with some goods that are commonly used as daily necessities being charged at a lower “merit rate”. Also, items that are understood as “sin” goods or luxury goods should be charged at a higher “special rate”.

A study of past GST disputes found that the majority of disputes on classification and rate were in the food and automobile parts sectors. Classification of food items is challenging due to multiple similar products in the market.

From the debate over caramelised versus salted popcorn to disputes relating to Malabar parathas, flavoured milk, rava idli mix, fryums, and papad, the sector has been riddled with tax ambiguities. A case in point is baklava, which can be considered a sugar confectionery or a bakery product depending on how one perceives the product. The reforms, therefore, envision a single tax rate for the food sector, to ensure clarity.

The automotive sector, too, has seen disputes, particularly in the classification of auto components. Often, such disputes reached the Supreme Court, but the ambiguity on their classification persisted. A uniform rate here will bring enormous relief, enhancing industry confidence and reducing litigation.