Rationalised GST rates key for jobs and growth

On July 1, 2017, the Indian government took a huge step forward by introducing Goods and Services Tax (GST), replacing a fragmented tax system with a unified one. Since then, the government has focused on improving GST efficiency to boost India’s economic growth. The key challenge now is sustaining this positive momentum.Union finance minister Nirmala Sitharaman has advocated for tax simplification and tech-enabled reforms. In September, she highlighted efforts to streamline litigation with the setting of GST Appellate Tribunal and using artificial intelligence (AI) to enhance the tax system and ease of doing business.

Towards simplification and ease of doing business

In this context, it will be pertinent to analyse the recent recommendation of the Group of Ministers (GoM) on GST rate rationalisation.

Take the case of the proposal to introduce a new fifth GST slab of 35% for products like aerated beverages and tobacco, which may boost revenue but could also impact livelihoods and fuel illicit trade.

It would be useful to analyse the aerated beverages industry, which is constrained by a tax structure that hinders growth, innovation, and employment potential. India has one of the highest tax rates for carbonated soft drinks (CSDs), while over 90% of countries taxing sugar-sweetened beverages (SSBs) have much lower rates. Moreover, the high tax burden is applied regardless of sugar content, while the World Health Organization (WHO) and World Bank recommend fiscal measures to incentivise healthier product formulations, including layered taxation based on sugar content.

In case of the tobacco sector, India today has become the fourth-largest illicit market in the world because of huge tax arbitrage and the fact that according to WHO reports, legal Indian cigarettes are the most unaffordable in the world when measured against the paying capacity of consumers. The key question here is whether the increase in revenue from an increase in taxes will be sufficient to cover the tax losses due to the surge in smuggled goods.

Despite being a major producer of fruits like mango, banana, and guava as well as sugar, India’s potential in the CSD sector remains underutilised, with local resources not being maximised. This underdevelopment limits the sector’s ability to attract investment or create jobs, particularly in Tier 2 and 3 cities. A recent study highlighted the sector’s significant potential for job creation across the supply chain, contributing approximately `79,160 crore to the economy and creating approximately `6.91 lakh jobs in 2018-19.

In India, the tobacco economy supports 4.57 crore livelihoods, with 70% of employment tied to agriculture. In addition to this 4.57 crore, millions more depend on tobacco for income through packaging, warehousing, and related sectors. According to reports, from 2013-2023, the decline in tobacco production resulted in a loss of 23.8 crore man-days of employment.

Secondly, the GoM recommendations included changes to the GST structure for 148 items, with a tiered approach. Goods costing up to `1,500 would be taxed at 5%, goods priced between `1,500 and `10,000 would be taxed at 18%, and goods above `10,000 would be taxed at 28%.

A typical retailer stocks garments at various price points to cater to various customer demands. Now, will it not make his billing process more complex and put an administrative burden due to the tiered GST structure? 

International Impact 

Another aspect is the role of HSN (Harmonised System of Nomenclature) codes in GST. These codes classify goods internationally, facilitating trade and standardising goods classification under GST. However, India’s multi-tiered GST on the same goods can complicate cross-border transactions, making international trade more challenging for both Indian and foreign businesses.

Overall, the GoM recommendations will impact the ease of doing business in India, a process the government has been working to improve, as seen in efforts to reduce compliance burdens and initiatives like the National Single Window System (NSWS).

In its latest ‘Trade Watch’ report, NITI Aayog emphasised that India could benefit more from the ‘China Plus One’ strategy adopted by multinational companies. BVR Subrahmanyam, CEO of NITI Aayog, noted that the trade policies under US President-elect Donald Trump present opportunities, saying, “We are the man at first slip. The ball is coming in our direction. Whether we hold the catch or drop it is for us to decide…there will be a massive boom due to trade diversion.” A streamlined GST could be the perfect pitch to create more opportunities for success.

Tax rate fluctuations are often detrimental to business, forcing companies to adjust their models, which can hinder industry growth, particularly in emerging sectors. For example, the legal gaming industry has been affected by the 28% GST on total player deposits. According to an E&Y insight article, this high tax rate, one of the highest globally, has hindered the sector’s growth potential.

The government is actively reforming GST to support growth amid changing dynamics. Rate changes must boost public revenue while enabling businesses to invest and create jobs. A balanced, flexible approach will ensure consistent growth and ease of doing business, positioning India for success in 2025 and beyond.