GST at crossroads

The tax has reached a turning point in its evolution where reforms must focus on rethinking its design

- R KAVITA RAO

In its evolution, the goods and services tax (GST) regime is reaching a point where discussions on design changes need to be explored. The back-to-back loans taken by the Centre to meet compensation commitments following the Covid-19 pandemic are expected to be repaid by November 2025. The legal limit for the levy of the compensation cess extends till March 2026. This is a critical point in the evolution of the tax, where a significant comprehensive reform can be discussed. Beyond the question of whether the cess should be extended in its current or a different form, there are a few other design issues that need to be explored and sorted out.

To begin with, it is important to ask what the rationale for reform should be. Reform in the design could be driven by the need to raise additional revenues. Alternatively, given the level of revenues being raised, reform could target changing the rates to reduce the cost of compliance and administration. Fewer tax rates are argued to lower the cost of compliance and administration, by reducing the scope for misclassification and the resulting disputes. A third factor to consider is reducing the extent of distortion caused by the regime; commodities with more elastic demand should face lower taxes, while those with inelastic demand should be taxed at higher rates.

The issues to consider are: Should the rates be rationalised to bring down the number of rate slabs, how should cess be dealt with, and can the base for GST be expanded in any significant manner? We will briefly look at each of these aspects.