Why the GST Council is Struggling to Deliver the Big-Ticket Reforms India Needs?

In September, a video surfaced of a Coimbatore-based restaurateur apologising to Union Finance Minister Nirmala Sitharaman. The apology followed an event where the restaurateur had raised concerns about the varying Goods and Services Tax (GST) rates applied to sweets, savouries, and bakery products, sparking widespread attention.

He talked about the challenges faced by hoteliers in billing, pointing out that while a plain bun doesn’t attract GST, a cream bun is taxed at 18 per cent. His humorous remark about customers opting to buy the bun and cream separately to assemble their own cream bun to avoid the GST drew laughter from the audience.

What amused the audience, however, reflects just one of many pain points of the GST system introduced seven years ago, with subsequent reforms progressing at a sluggish pace. And the 55^th GST Council meeting, set to convene on December 21 in Jaisalmer, Rajasthan is expected to continue the trend.

High on Collections

The late renowned economist Bibek Debroy, along with his frequent co-author Aditya Sinha, emphasised the need for big-ticket GST reforms in their column for Outlook Business before the Lok Sabha elections. They wrote, “Key reforms should include convening regular GST Council meetings. Additionally, simplifying the GST structure is essential.”

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They said so because while GST collections have shown steady year-on-year growth, the growth fails to mask concerns about the Indian economy.

According to the Ministry of Finance data, total GST revenue increasedfrom Rs 11.37 lakh crore in 2020-21 to Rs 20.18 lakh crore in 2023-24. During this period, the average monthly collection rose significantly from Rs 0.95 lakh crore to Rs 1.68 lakh crore.

On the other hand, India’s economy grew at a seven-quarter low of 5.4 per cent in the second quarter of the current financial year, driven by weaker manufacturing and private consumption. Private consumption fell from 58.1 per cent of India's gross domestic product (GDP) in 2021-22 to 55.8 per cent in 2023-24.

This means that the rise in GST collections is largely due to the system's ability to plug loopholes and expand the taxpayer base, rather than indicating an actual increase in economic spending.

“While GST collections have shown consistent growth, higher taxes can dampen consumer spending and potentially deepen economic slowdowns,” says Manish Dubey, partner at CorpAcumen Advisors.

Experts suggest that the government may instead need to consider lowering tax rates in India, especially in a scenario where inflation remains persistently high and income growth sluggish. But the task before the GST council is not that straightforward.

Strike a Balance

Days before the 54th GST Council meeting, a senior official in the Ministry of Finance revealed that the average GST rate is on a declining trend, leading to reduced government revenue. “The rate has declined further compared to last year,” the official said.

Sitharaman, speaking at an event organised by the Revenue Bar Association in Chennai, earlier highlighted that the average GST rate dropped to 12.2 percent in 2023, significantly below the revenue neutral rate (RNR) of 15.3 percent.

The RNR represents the tax rate at which government revenue remains unaffected despite changes in tax laws. Therefore, the GST, despite the higher collections has actually resulted in a decline in the central government's income, emphasising the need for rationalising tax rates to address the shortfall in both revenue and consumption.

This process involves reducing the number of GST slabs and grouping commodities within the same category under a single rate to minimize classification and rate disputes. At present, India has four primary GST slabs: 5 per cent, 12 per cent, 18 per cent, and 28 per cent, besides special rates for certain items like gold and precious stones.

Navigating Federalism

Former Revenue Secretary Sanjay Malhotra, now serving as the Governor of the Reserve Bank of India (RBI), had mentioned in an earlier interview with Outlook Business that the government is committed to rationalising GST rates.

“But we have to keep in mind that it has to be revenue neutral. Rationalising tax rates presents significant challenges. For instance, if we reduce the number of tax rates, it may not be acceptable to the governments (state) because they could lose revenue. Conversely, increasing the number of rates would also not be acceptable,” Malhotra explained.

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Since the introduction of GST reform, excluded items like petrol and liquor have remained among the few significant local revenue sources for state governments. And any changes in the GST regime, experts believe, will substantially affect the states as well.

“The finance ministers of the states don’t say it in open but they are very cautious about any potential loss in their revenue,” says a senior finance ministry official. “That’s why we have to carefully handle the whole rate rationalization process and inclusion of exempted items,” adds the official.

In such case, the government should prioritise further enhancing tax collection efficiency through advanced processes like data analytics and AI tools, says Adarsh Somani, partner at Economic Laws Practice. He suggests this as it will help in exploring measures to boost consumer spending, potentially by lowering rates on consumption-driven goods and services.

Sources say the upcoming meeting in Jaisalmer is likely to provide relief on premiums for certain health and life insurance products, along with several other items.

Currently, an 18 per cent GST is applied to insurance premiums. The GST Council is expected to approve a proposal to exempt health and life insurance policies up to Rs 5 lakh from GST. This move aims to reduce the tax burden on lower- and middle-income groups. Additionally, similar exemptions may be extended to insurance policies for senior citizens.

While the meeting may bring some relief to India’s middle class, the major reforms that the Indian economy urgently needs may take longer to materialise.