The exercise to reduce GST rates is in its final stage and will soon be placed before the GST Council. Union Finance Minister Nirmala Sitharaman has stated that she is personally overseeing the process to ensure that GST rates are streamlined. But what does this mean? Will there be major structural changes, or will it merely be a rate cut? This remains a key topic of discussion among political parties.

There is certainly a need for a comprehensive restructuring of GST rates rather than piecemeal adjustments that fail to address fundamental issues. Under the present system, the GST tariff structure is overly complex and burdensome. For instance, there are three different tax rates on popcorn and differential taxation on cream buns versus regular buns. One hopes that GST 2.0 will result in a simplification of tax slabs, truly embodying the “one nation, one tax” principle, rather than being mere window dressing in the name of reform.

According to former Chief Economic Advisor Arvind Subramanian, the GST regime currently includes nearly 100 different tax rates. This complexity places a significant compliance burden on businesses while also enabling large-scale tax evasion.

The Goods and Services Tax (GST) in India, introduced in 2017, aimed to simplify the indirect tax system by subsuming multiple taxes into a single framework. However, concerns have been raised over the years regarding high GST rates on essential goods and services, which impact businesses and consumers alike. There is a growing demand for a reduction in GST rates for several reasons.

High GST rates, especially on essential goods and services, can deter consumption. Lowering GST rates can enhance consumer spending, thereby driving demand and stimulating economic growth. A reduction in tax rates can also aid industries in recovering from economic slowdowns, particularly in the post-pandemic period.

Moreover, high tax rates often encourage tax evasion and the growth of the informal economy. If GST rates are rationalized, compliance is likely to improve as businesses would be more willing to register and pay taxes rather than resort to illegal means to avoid heavy taxation.

The Prime Minister and the NDA government expect SMEs to form the backbone of India’s economy. However, these businesses often struggle with high GST rates, which increase operational costs. A reduction in GST rates can provide much-needed relief to small businesses, making them more competitive, fostering entrepreneurship, and contributing significantly to the goal of achieving a $5 trillion economy.

Lowering GST can also help reduce the prices of goods, improving affordability and enhancing overall purchasing power—essential for a developing economy like India. This, in turn, can facilitate the growth of MSMEs.

Competitive tax rates will also enhance India’s attractiveness as a destination for both domestic and foreign investors. High indirect taxes act as deterrents to investment in key sectors such as manufacturing, infrastructure, and services. By reducing GST rates, India can improve its ease of doing business and attract greater investments.

Experts emphasize that certain industries, such as real estate, automobiles, and hospitality, have been adversely affected by high GST rates. Lowering taxes in these sectors can lead to increased demand, job creation, and a positive multiplier effect on the economy.

Reducing GST rates in India is essential for fostering economic growth, ensuring better compliance, supporting SMEs, and providing relief to consumers. A well-balanced approach that considers revenue implications while prioritizing economic stimulation can help create a more efficient and fair taxation system. Rationalizing GST rates will ultimately contribute to making the Indian economy more robust and resilient in the long run.