Reforming the Goods and Services Tax

The goods and services tax (GST) implemented in 2017 continues to be a “work in progress” when it comes to its basic design and structure. The 50th GST Council meeting held on 11 July 2023 realigned the rates of certain products from a higher rate category to a lower rate category, exempted certain essential imported drugs from GST, and also applied a 28% tax rate on the full value of online gaming, casinos, and horse-trading. It is true that GST, when introduced in 2017, had a high element of selectivity in taxation. The rate differentiations were more actuate then compared to what it is today. However, to derive the full benefit of GST, it is important to minimise selectivity in taxation. It is also important to preserve the fiscal autonomy of the states. The GST should try to achieve the right balance between tax harmonisation and fiscal autonomy.

In a GST regime, selectivity introduces subjectivity and perception in determining tax policy and is contrary to the basic principle of GST. This makes the GST system non-neutral to economic activity and is highly distortionary. The basic principle of modern-day taxation is to adopt a “broad-based and low-rate approach” to taxation. Though the current GST regime is an improvement on the earlier tax regime, it is still far from an ideal GST structure. It is based on rate harmonisation across levels of governments but highly differentiated across commodities and services. What is required is just the reverse.