Ahead of the 55th GST Council meeting on December 21, experts highlight the need for a simplified GST system to foster India's economic growth, advocating for a three-tier structure that reduces complexity, enhances transparency, and benefits both businesses and consumers.
Tax experts are voicing their unified opinion on the need to simplify thecountry’s Goods and Services Tax (GST) structure as the GST Council meets for the 55th time. With the focus shifting towards rationalizing GST rates experts are weighing in on what the ideal tax slabs should be for a country as, and the steps needed to ensure a more efficient, equitable, and simplified system.
The Case for Simplification
Experts agree that India’s current four-tier GST system, with rates of 5%, 12%, , 18%, and 28%, creates complexity for businesses, tax administrators, and consumers alike. Many suggest a shift to a three-tier structure, consisting of a low rate for for essential goods and services, a standard rate for most goods, and a higher rate for luxury or sin goods.
From a tax perspective, there should be 3 rates of taxation, excluding sin/luxury items instead of the present 4 rates of taxes. This would bring about a lot of clarity and avoid confusion for any classification.
Parag Mehta, Partner at N.A. Shah Associates LLP
Rationalizing the GST structure would help reduce confusion, simplify compliance, and improve the overall business environment, experts contend.
For a country with diverse economic strata, a three-tier GST structure could strike a balance between equity and simplicity Prateek Bansal, Tax Partner at White and Brief – Advocates & Solicitors.
The Proposed Three-Tier GST Structure
Experts have proposed a range of tax slabs for this simplified structure:
Low Rate (5-8%): Applied to essential goods and services to minimize the burden on lower-income groups.
Standard Rate (12-15%): Applied to most goods and services, forming the backbone of the tax structure.
High Rate (25-35%): Applied to luxury or sin goods, such as tobacco, aerated drinks, and alcohol, to discourage consumption while generating additional revenue.
A more rationalised structure could involve consolidating the 12% and 18% slabs into a single middle tier, reducing the number of slabs to three: 5%, 12% (or 15%), and 28%. This would reduce confusion and simplify compliance, especially for SMEs Rajat Mohan, Senior Partner at AMRG & Associates
Ensuring Equity and Transparency
Experts stress that the GST system must be fair and equitable. The proposed structure ensures that essential goods remain affordable, while luxury items and demerit goods like tobacco and alcohol are taxed at higher rates. This approach aligns taxation with social policy goals.
“The GST system should ensure that essential goods, such as food, medicine, and education, are taxed at lower rates or exempted to keep them affordable for the masses,” said Rajat Mohan. “Conversely, luxury items and demerit goods like tobacco and alcohol can remain in the higher slab.”
Additionally, experts emphasise the need to streamline tax administration, enhance IT infrastructure, and automate compliance processes. This would reduce administrative burdens, making it easier for businesses to comply with the GST rules.
The Challenges of Rate Rationalisation
While most experts support the idea of rationalising the GST rates, some highlight the challenges in achieving a simplified structure, given India's vast and diverse economic landscape. Merging certain tax slabs, such as the 12% and 18% brackets, may be difficult due to regional disparities and sector-specific considerations.
Considering the vastness and diversity of the manufacturing as well as service sector of India, achieving the aforesaid structure is easier said than done. The government should establish a clear roadmap with defined timelines and guidelines for achieving this and should include extensive stakeholder consultation, detailed impact assessments, and specific measures to protect vulnerable sectors Sanjay A. Chhabria, IDT lead at Nexdigm
The 35% GST Rate for Sin Goods
Ahead of the meeting, the Group of Ministers (GoM) on GST rate rationalization, led by the Deputy Chief Minister of Bihar, has recommended the introduction of a new 35% GST rate for tobacco, tobacco products, and aerated drinks. This would be an increase from the current 28% rate. However, the Central Board of Indirect Taxes and Customs (CBIC) has clarified that the GoM has not yet submitted its recommendations to the GST Council, which is the final authority on determining tax rates.
The anticipated GST upsurge of 35% for sin goods will mark the first momentous restructuring of GST rates since its implementation in 2017. The recommendation aims to align tax rates with the value and importance of the product, where high-value sin goods attract the highest tax rate, whereas essential goods attract minimal or no tax. Dipti Nayak, Director at Bhuta Shah & Co. LLP
While this increase in rates for sin goods is expected to boost government revenue, it stands in contrast to the government's broader commitment to simplify the tax structure and reduce the number of GST slabs.
Moving Toward Simplicity and Equity
As the government prepares to review and potentially revise the GST system, experts agree that rationalizing the rates and consolidating tax slabs is a step in the right direction. Measures such as improved IT infrastructure, streamlined filing processes, and enhanced dispute resolution mechanisms could further improve efficiency. A simpler GST structure would reduce confusion, promote compliance, and create a more business-friendly environment for both small and medium enterprises (SMEs) and larger corporations alike.
“A simpler GST means fewer disputes, easier compliance, and a better experience for both businesses and consumers,” said Sandeep Sehgal, Partner at AKM Global. “Merging some existing slabs and regularly reviewing the rates could help achieve this goal.”
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