Copyright infringement not intended

Source: Business Standard

Context

On July 1, 2025, India observed eight years since the implementation of the Goods and Services Tax (GST), but the celebration brought with it troubling economic indicators.  In June, GST collections fell to ₹1.85 lakh crore, the lowest in four months. Year-on-year, growth was only 6.2%, the worst in four years.

Imperative for Structural Reforms

• Recent GST collections imply a decrease in economic activity and highlight systemic inefficiencies. 
• In June 2025, GST collections totaled ₹1.85 lakh crore, the lowest in four months. 
• This was a modest 6.2% gain over June 2024, the smallest growth rate in four years. 
• When refunds were factored in, the actual increase in government collections was only 3.3%.  Furthermore, revenue from domestic transactions, excluding imports, increased by an anemic 4.6% over the previous year, barely above the average inflation rate.
• Because GST is a consumption tax, any drop in receipts immediately reflects a downturn in economic activity. 
• This situation calls for prompt attention and appropriate reforms.

What Do Low GST Collections Reveal?

• Sluggish Economic Activity
  
  
• GST is a consumption-based tax, so low collections reflect reduced demand and consumption.
  
  
• This indicates a slowdown in economic growth, as consumers and businesses cut back on spending.
  
  
• Tax System Inefficiencies
  
  
• The marginal growth of 3.3% in net collections (after refunds) suggests loopholes in compliance, delays in refunds, and weak enforcement mechanisms.
  
  
• These inefficiencies point to a need for streamlined administration and better monitoring of tax processes.
  
  
• Weak Revenue Buoyancy
  
  
• Revenue from domestic transactions rose by only 4.6%, which barely outpaces inflation.
  
  
• This signals a lack of buoyancy in the GST system, despite a stable and wide tax base.
  
  
• Ideally, tax revenues should rise faster than GDP, but the current trend reveals limited responsiveness of the system to economic changes.

Why Is the Exclusion of Fuel from GST Debated?

• Revenue Autonomy for States
  
  
• Taxes on petrol and diesel are key independent revenue sources for States.
  
  
• Bringing fuel under GST would pool the revenue with the Centre, thereby reducing States’ financial autonomy.
  
  
• This is politically sensitive, especially for States relying heavily on fuel taxes to fund welfare schemes.
  
  
• Undermines ‘One Nation, One Tax’ Goal
  
  
• Excluding key commodities like fuel creates fragmentation within the GST framework.
  
  
• It violates the principle of tax uniformity, resulting in varying fuel tax rates across states.
  
  
• For instance, a truck transporting goods across state lines faces differing fuel taxes, adding to logistics costs and compliance challenges.
  
  
• Public Demand for Price Rationalisation
  
  
• There is increasing demand to bring fuel under GST to reduce retail prices.
  
  
• Currently, petrol is taxed at around 100% (excise + VAT).
  
  
• If brought under the 28% GST slab, fuel could become significantly cheaper, which is crucial during inflationary periods.
  
  

Key Reform Areas in India's GST Framework

Inclusion of Fuel and Alcohol in GST

• Current Exclusion: Fuel and alcohol are outside the GST ambit, allowing state governments to levy their own taxes and retain independent revenue sources.
  
  
• Impact on GST Vision: This exclusion goes against the "One Nation, One Tax" principle, undermining the unified tax system intent of GST.
  
  
• States’ Resistance: States fear:
  
  
• Loss of fiscal autonomy
  
  
• Delays in receiving central tax devolution
  
  
• Proposed Solutions:
  
  
• Centre must ensure higher and timely tax transfers to build trust.
  
  
• Reduce dependence on non-shareable cesses to increase divisible pool.
  
  
• States should avoid using enhanced revenues for untargeted election freebies.
  
  

Rationalisation of GST Rates and Compensation Cess

• Current Structure: GST has multiple slabs—0%, 5%, 12%, 18%, 28%, plus additional cesses, causing complexity.
  
  
• Ongoing Reforms: The GST Council’s fitment and rate committees are reviewing the possibility of slab reduction for simplification.
  
  
• Compensation Cess:
  
  
• Introduced to compensate States post-GST rollout.
  
  
• Initially meant for 5 years, but extended till March 2026 due to COVID-related loan obligations.
  
  
• Rationale for Removal:
  
  
• Its original purpose is fulfilled.
  
  
• Should not be merged into standard GST rates.
  
  
• Benefits:
  
  
• Boosts public sentiment
  
  
• Encourages urban consumption, vital for economic recovery

What does "fewer GST slabs" mean?

It entails consolidating some of these tax rates to create a simpler, more consistent GST system, such as integrating 12% and 18% into a single standard rate. India has several GST slabs, including 5%, 12%, 18%, and 28%. Plus 0% (exempt) and special rates on specific goods/services.

How will fewer GST slabs increase tax efficiency?

• Simplifies Compliance for Business: Fewer slabs reduce confusion and errors in tax calculation, categorization, and filing, particularly among small enterprises. For example, a product such as packaged snacks now gets separate GST rates depending on branding; unifying slabs prevents such disagreements.
• Reduces tax evasion and litigation. Multiple slabs allow for misclassification and disagreements about applicable rates. Fewer rates result in clearer guidelines and fewer loopholes. For example, footwear priced beyond ₹1,000 is taxed at 18%, whereas below ₹1,000 is taxed at 5%, which might lead to pricing manipulation.
• Increases Consumption and Revenue Predictability: A streamlined rate structure boosts consumer trust, decreases cascading effects, and stimulates spending, resulting in higher overall collections. For example, countries with uniform GST regimes, such as Singapore (7%) and New Zealand (15%), report superior compliance rates and steadier revenue.

Practice Question Q. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017.