Making GST lean and low

The rate rationalisation move will boost consumer sentiment, but the impact on government finances needs to be watched

From September 22, the central piece of India’s indirect tax regime, the Goods and Services Tax (GST) will be both lean and low. Lean because there are now only three (in fact, mostly two) tax slabs compared to the previous five, and low because a large number of commodities and services have seen a reduction in tax rates.

The GST Council’s decision needs to be praised as it has given a boost, both material as well as sentimental, to consumer sentiment, especially among the non-rich, ahead of the critical festive season. (@FinMinIndia X via PTI)

GST created a unified national market for goods and services in India after decades of persuasion and negotiation. It was a leap of faith for everybody, from the government’s fiscal managers to businesses who had to deal with something that had never existed to states that gave up their sovereign right to tax. Could things have been done in a better way when GST was rolled out in 2017? Definitely. Just like there are bound to be voices which will make sensible points about how the latest GST reform, both in terms of rates and processes, could also have done better.

In a country as diverse as India, economically, politically and regionally, there is always a case for the proverbial “could have been done better”. However, what matters the most is breaking inertia rather than some elusive quest for perfection. Great cannot become the enemy of good.

It is on this count that the latest GST Council’s decision needs to be praised. It has given a boost, both material as well as sentimental, to consumer sentiment, especially among the non-rich, ahead of the critical festive season. It has also provided welcome relief from the tax burden on commodities and services of both frequent and necessary use, be it stationery for children or offices and life and health insurance for families. The promise of a GST appeals tribunal and other such process reforms should also make things better for businesses who have been raising concerns about unjustified tax demands. A predictable tax regime is key to boosting investment in any economy, especially from foreign investors. The GST council should factor in the feedback from the latest series of process reforms to make things better.

As is always the case, there are no free lunches in the world. The GST rate rationalisation is expected to come at a fiscal cost, which the government is hoping will eventually be mitigated with a rise in spending. Until that promise has been realised, there should be careful monitoring of the fiscal dynamics which will be unleashed from here on. State finances will be the critical variable to watch.