A K Bhattacharya: Nirmalaji, Streamline GST Assessment Machinery!

‘It must become faceless, just as the entire direct tax assessment system has already become fully online, without any human intervention in the normal course,’ recommends A K Bhattacharya.

Illustration: Uttam Ghosh/Rediff

The decision on revamping the goods and services tax (GST) regime was the third such exercise in the eight years since its launch in July 2017.

How different was this third exercise at revamping GST? And how much more different should it have been?

First, the differences. The decisions of the GST Council on September 3 resulted from by far the biggest such exercise.

Over 450 goods and services saw their GST rates change from September 22. From a taxation point of view, this is substantially more impactful than the Union government’s annual Budgets during the pre-GST days.

The rate rationalisation this time impact over 420 goods covering a vast range of sectors, including food, tobacco, agriculture, fertilisers, coal, renewable energy, textile, health, education, consumer electronics, paper, transportation, sports goods, toys, leather, wood, defence, footwear, construction, handicrafts and machinery.

In addition, as many as 34 services in sectors such as transportation, job work, construction, local delivery and insurance will see their rates change.

In comparison, the first two exercises were much smaller in both range and impact. In November 2017, just four months after its launch, the GST Council changed rates for as many as 94 categories of goods.

The second exercise, even smaller than the first, took place 13 months later in December 2018. Only about 17 categories of goods saw their rates change.

The timing of these decisions, however, was somewhat similar.

The third exercise has taken place a few months before the crucial state assembly elections in Bihar later this year, to be followed by equally important assembly elections in West Bengal, Kerala and Tamil Nadu in the first half of 2026.

The first exercise at rate rationalisation took place a few weeks before assembly elections in Gujarat in December 2017, and ahead of elections in Tripura and Karnataka in the first half of 2018.

And the second rate rationalisation too took place a few months before the general elections of 2019.

But a key difference in this respect is that the first and second exercises were conducted very soon after the launch of the GST regime and even before tax collections under the new system could attain the desired stability.

Not surprisingly, the pace of tax collections subsequent to the first two rounds of rate rationalisation took an adverse knock.

In contrast, the third exercise has been completed after eight years and deliberations over the nature of the changes to be introduced have taken place for well over a year.

And the collections rate has also stabilised, even though not at the desired level.

Last year’s net GST collections as a percentage of gross domestic product (GDP) were still a little lower than those in the pre-GST years.

An even bigger difference this time is in the nature of the rate rationalisation.

Both in 2017 and 2018, all the changes in rates were unidirectional — they were all brought down to the lower slabs without any change in the number of duty slabs.

The 2025 exercise is not just about reducing the rates, but also about raising them in addition to bringing down the number of main slabs.

Barring a dozen-odd items, almost all goods and services are being clubbed under two slabs — 5 per cent and 18 per cent.

And this rationalisation is sought to be achieved by reducing the rates for about 380 goods and 24 services.

In addition, rates for about 40 goods and 10 services are to be raised.

It is this relatively less talked about decision to raise rates on about 50 items that has given the government the confidence of containing the revenue impact of such a large number of rate cuts.

Based on the collections in 2023-2024, the government’s estimate of the revenue impact of the rate reduction is about Rs 93,000 crore (Rs 930 billion) in the current year.

However, the rate increase decision has reduced that impact by about Rs 45,000 crore (Rs 450 billion) and brought down the overall impact to Rs 48,000 crore (Rs 480 billion) for the current year.

The government hopes to absorb the impact over time depending on the tax buoyancy level, triggered by the rate reduction, and the improvement in compliance.

Whether the government succeeds in achieving this goal or not, the fact is the increased rates for over 50 items have made the government’s fiscal task a little less challenging.

Another big difference in the third exercise on rate rationalisation is the manner in which the problem of an inverted duty structure in many sectors like man-made textiles and fertilisers has been addressed, and procedures for claiming input tax credit has been streamlined along with the formation of country-wide appellate bodies to resolve taxpayers’ grievances.

What other differences could have made this exercise stand out compared to the previous two rounds of rate rationalisation?

One, just as the GST Council took the bold decision to abolish two slabs — of 12 per cent and 28 per cent — it could have improved the GST system’s average weighted effective tax rate (which has been falling in the last eight years) by opting for a new slab of, say, 8 per cent after abolishing the existing slab of 5 per cent.

Not all is lost though. At the next meeting of the GST Council, it could actually provide a clear road map of gradually raising the 5 per cent slab to 8 per cent in phases in a period of about two years.

Restoring the average effective tax rate to its earlier level of about 15 per cent should be treated by the GST Council as an important goal.

This will also help fiscal consolidation by boosting revenue collections.

Two, preparations must be made to include petrol and diesel under the GST system.

Its inclusion need not necessarily mean that the existing excise rates that are close to 57 to 70 per cent will have to be brought down to 40 per cent.

These rates may well be kept at these levels with the help of extra levies.

But once they are under the GST system, every company using petrol and diesel will benefit as they will be able to set off their tax pay-out on these products against their final tax outgo.

This will be a huge benefit for companies, including the micro, small and medium enterprises, enhancing their competitiveness.

Finally, the GST tax assessment machinery has to be streamlined. It must become faceless, just as the entire direct tax assessment system has already become fully online, without any human intervention in the normal course.

A timeline for making the GST assessment system completely online and faceless would be a good beginning.

The government has a short window of opportunity to bring about these pending GST reforms.

They should be implemented well before the next general elections if it does not want the entire exercise to be stymied by avoidable political considerations.

Remember that talks about reducing the number of slabs and cutting rates began in 2022, when the GST regime completed five years.

The reduction in slabs and rates has taken more than three years to implement, with general elections in between.

Feature Presentation: Aslam Hunani/Rediff