Context:
- According to a Crisil report, the recent GST rate rationalisation is unlikely to impose a fiscal burden on the government despite an estimated short-term annualised revenue loss of ₹48,000 crore.
- The reform follows a GST Council decision to simplify the tax structure by moving towards a two-rate GST regime.
Key Highlights:
Government Initiative / Policy Details:
- GST Council Decision:
- Rationalisation of GST slabs from multiple rates to a two-rate structure of 5% and 18%.
- New rates effective from September 22.
Fiscal Estimates & Data:
- Estimated short-term revenue loss: ₹48,000 crore annually.
- Total GST collections (previous fiscal): ₹10.6 lakh crore, indicating a strong revenue base.
Revenue Composition Before Rationalisation:
- 18% slab: Contributed 70–75% of GST revenue.
- 12% slab: Contributed 5–6%.
- 28% slab: Contributed 13–15%.
Sectoral Impact & Coverage:
- Reduction or removal of the 12% slab is unlikely to significantly affect revenues.
- Fast-growing services (e.g., mobile tariffs) remain taxed at existing rates.
- New services such as e-commerce delivery brought under GST at 18%, expanding the tax base.
Economic Rationale:
- Simplification expected to improve compliance, reduce classification disputes, and boost tax buoyancy.
- Lower taxes on mass consumption goods may increase disposable income, stimulating demand and indirect tax collections.
Relevant Prelims Points:
- Issue: GST rate rationalisation and fiscal implications.
- Causes: Need for simplification, compliance enhancement, and efficient tax administration.
- Government Initiatives: GST Council-led reform towards a two-rate GST structure.
- Benefits:
- Simplified tax system.
- Wider formalisation of goods and services.
- Medium-term revenue stability through higher compliance.
- Challenges:
- Short-term revenue loss.
- Transition and rate-adjustment issues for businesses.
- Impact:
- Limited fiscal stress due to strong GST base and improved buoyancy prospects.
Relevant Mains Points:
- Definitions & Concepts:
- GST: Destination-based indirect tax on supply of goods and services.
- Tax Buoyancy: Sensitivity of tax revenue growth to GDP growth.
- Fiscal Burden: Pressure on government finances due to revenue shortfall or expenditure rise.
- Governance Perspective:
- Rationalisation enhances ease of doing business and reduces litigation.
- Economic Perspective:
- Broadening of tax base offsets rate reductions.
- Demand-led growth may compensate for initial revenue loss.
- Way Forward:
- Monitor revenue trends post-rationalisation.
- Strengthen GST compliance mechanisms using technology.
- Gradual convergence towards a simpler, stable GST regime.
UPSC Relevance (GS-wise):
- GS Paper III: Indian Economy, taxation reforms, fiscal policy.
- GS Paper II: Governance, GST Council, cooperative federalism.