Towards GST consensus

With little headway in the restructuring of the goods and services tax (GST) framework, it is just as well that Union home minister Amit Shah plans to discuss the issue with states to try and get them on board before the GST Council’s next meeting. The fact is that a consensus on rate rationalisation has eluded the GST Council despite several rounds of discussions, at the 45th meeting in 2021, and more recently, the 55th meeting in December 2024. Given how contentious some of the proposed changes can be and how these might be contested even by Bharatiya Janata Party-ruled states, trying to build consensus so that the proposals are ratified quickly at the GST Council meet would be worth the effort. In any case, getting involved in politically sensitive economic matters is nothing new for the home minister as he has been involved in the past in decisions on disinvestment, price rise of staple food items, etc.

Indeed, a rejigging of the GST construct has been on the anvil for some time now. Among the main objectives is to lower the number of slabs from five—0%, 55%, 12%, 18%, and 28%—to four by doing away with 12%. Experts point out that the 12% slab, which covers products such as packaged foods, household goods, and medical supplies, contributes little in terms of revenue and does not really add value to the GST framework. Instead, it burdens assessees with administrative workload. The 5% and 18% slabs, under which essential and discretionary items fall, fetch the bulk or 70-75% of the GST collections; the 12% slab contributes just 5-6%, while the 28% slab brings in 13-15%.

In simplifying the structure, the tax on one set of products and services is expected to be lowered to 5% while for others the levy could be raised to 18%. In the past, debates have raged on the rates at which certain goods or services should be taxed; the status of online gaming, for example, has been hotly debated. Again, a couple of states have asked for the GST on both life and health insurance premiums to be pared to 5% from 18%; others want no levy at all. There is also the likelihood of the tax on products like air conditioners being lowered from the current 28%. All this can become a reality if the state finance ministers don’t squabble like fractious children. As relations between some states and the Centre are already fraught, preliminary consultations in the presence of a senior minister like Shah could help in reassuring states that are apprehensive of losing out following the rate changes.

In fact, it would help if the states are given a sense of the revenue implications of potential changes especially since the compensation cess, which is levied on goods like tobacco, coal, soft drinks, luxury cars, and pan masala, will be withdrawn next March. There has been some chatter to the effect that the compensation cess will be replaced with a health cess and a clean energy cess. With the Group of Ministers yet to formally announce any consensus on the issue, further discussion to ensure all states are convinced would be helpful. The introduction of a new cess might require amendments to the Constitution. Gross GST collections in FY25 rose 9.5% to Rs 22.09 lakh crore but the pace of growth could moderate in the current year. It’s important the rate changes do not derail the pace of collections.