Yet Another Tax Slab Will Kill The Very Purpose Of Introducing GST

The proposal to introduce a new slab in the goods and services tax (GST) regime is a regressive idea as it will further complicate the indirect tax system. Ahead of the GST Council meeting this month, a Group of Ministers (GoM) has reportedly proposed major adjustments to tax rates on 148 items, including of ‘sin products’ like cigarettes, other tobacco products and aerated drinks. At present, these are under the 28 per cent tax slab, for which the GoM has mooted a new slab of 35 per cent.

It needs to be remembered that the GST regime was introduced with the primary objective of simplifying the complex indirect tax structure. Its foundational principle was to create a unified tax system that would subsume various indirect taxes, making compliance easier for businesses. Currently, there are four GST slabs-five per cent, 12 per cent, 18 per cent and 28 per cent. Essential items are either exempt or fall in the lowest slab. The multiplicity of GST slabs has complicated tax collection. In fact, the very purpose of introducing GST gets defeated with numerous slabs.

Ideally, there should be just one slab. Since there are four GST rates (five, if the zero rate is also included), the GST Council should strive to gradually bring down those numbers. Adding a new slab is a step in the opposite direction. Instead of reducing the existing slabs to make compliance easier, this proposal risks making the system even more fragmented and inefficient. Besides, there are a lot of anomalies in the system. For instance, milk doesn’t attract any GST but skimmed milk powder does, at five per cent, while butter and ghee are taxed 12 per cent.

Simplification of the GST structure is the need of the hour. A single GST slab, or at least a significantly reduced number of slabs, would enhance the ease of doing business. Micro, small and medium enterprises often find it tough to negotiate the maze of GST structure. One slab, or fewer slabs, will make it easier for them to comply with GST regulations, thus reducing time and cost associated with tax compliance. This will also improve transparency and eliminates ambiguities and disputes related to classification of goods under different tax rates.

Further, a simpler structure can improve compliance rates, reduce tax evasion and litigation, and broaden the tax base. The reason the GoM has recommended a new slab is that the additional compensation cess will expire in March 2026. This money, raised from the cess on sin products is used to compensate for the revenue loss suffered from implementation of GST. The compensation was for five years from the implementation of GST in July 2017.

This was later extended. This brings us to the bigger question: should states be paid any compensation? After all, GST collection has more than doubled in the last seven years, from a monthly average of Rs. 89,885 crore between August 2017 and March 2018 to Rs 1.82 lakh crore in the first seven months of this fiscal. Instead of recommending the retrograde step of another slab, the GST Council should advise states to cut down wasteful expenditure like farm loan waivers and freebies.