The Government has always blown hot and cold whenever the topic of Rate Rationalisation in Goods and Service Tax (GST) has come about. From an interim report in 2022, to the constitution of a Government of Minister (GOM) panel and their meetings in 2023-2024, some progress has been undertaken to balance the present GST rate structure. However, there are no concrete proposals on the table even today and most of the ideas remain in the realm of speculation.

What is Rate Rationalisation? Simply put, the GST rate structure in India operates today under four main tax slabs – 5%, 12%, 18% and 28% which gives rise to complexity in business and skewed practical economic theory. Most goods and services today fall under the 18% bracket; however, certain essential goods are taxed under the 5% and 12% bracket. In practice however, different GST rates operate on the ground including a 0% rate. The primary aim of Rate Rationalisation is to consolidate or simplify the GST rates into two or possibly three groups or slabs (this was also envisaged in 2017 – when GST was coming into force). As below, this entails a retention of a high rate for example on luxury goods and consolidating the standard rates into a low rate for essential goods, and a mean rate for semi-essential goods and services, without tampering with the revenue collection.

In the years between 2017 and the present, revenue collections have seen significant upticks, with each month breaking the record for past collections. In a sense, this shows that revenues have stabilised to a certain extent which is a good first stepping stone for Rate Rationalisation. Another aspect is to achieve a lower Revenue Neutral Rate (RnR) which would show that indirect tax burdens are lowered on the taxpayer. If a reduction in some rates retains the present revenue collection figures, in economic theory, the Government would be at an ideal point in GST implementation.

The Government seems to be considering various permutations and combinations when it comes to rate rationalisation. While a very high rate of 35% seems off the table, there seems to be a broad consensus in the GOM that food items and other common household items are retained in a 5% slab. Also, while an understanding remains that the GST rate should not be a reflection of prices i.e. no ultra higher slab for luxury items, handbags, watches etc., one of the balancers in play is to bring back a rate of 28% to less frequently used items like make-up, clothes above INR 10,000, high end computers, luxury watches etc. which do not play a significant day to day role in a middle-class household. The philosophy seems to be to use such revenue to stabilise the loss of putting some essential items down to a lower rate of GST from their current 18% rate.

Why does rate rationalisation matter? The idea should be a scientific and strategic re-calibration of the current structure and focus on reducing the tax burden. Given the results of the 2024 general elections, the Government can ill afford to put a higher rate of tax on essential day to day goods. It must scientifically ascertain each category of goods and carve out differentia to optimise rax revenue. A good example is bicycles, as was also mentioned in recent conversations of the GOM, or edible oils. Bicycles come in a range of varieties like the common bicycle to the extremely high-end chassis(s) in the market. Similarly, edible oil can be a common variety (mustard) to high end (truffle oil, olive oil etc.). A carve out should be envisaged where goods in a common household is struck to a 5% rate, while the uncommon goods get pegged at a higher rate to balance revenue collection.

Further, rates moving down from 18% to 12%-15% may also lead to loss of revenue, which a government, which seems these days in a perennial collection mode, would not appreciate. In practice, and pragmatically, any ascensional deviance to the 5% - 8% rate for common household goods would not be a supportive policy outlook to the lower income vote bank of the Government, and further, may also be objected by the coalition partners of the Government. This becomes a big challenge to Rate Rationalisation.

The other business case of Rate Rationalisation is to do away with uncertainty in classification (conflicting advance rulings – mosquito repellents being classified at lower rates than mosquito bite medicaments – when both are essential items). A consistent rate would negate the uncertainty and confusion across the board. Focus on minimising inverted duty structure (e.g. as prevalent in the textile industry) is also another area which the Government should seriously consider, given the ascendency of the Indian textiles markets in global trade. Another broad case to support /balance lower taxes for essentials could be to bring items like natural gas and ATF inside the GST regime. This would increase and broaden revenue collections while enabling lower rate slabs on daily need items – striking a beneficial balance in the ecosystem.

In conclusion, the idea should be to make measured adjustments backed by scientific reasoning. In an already turbulent ecosystem, where the implementation of GST is panned left and centre in daily debate, minimising disruption while gradually streamlining the system should be the best practice adopted by the Government. This will also reflect a commitment to optimise the GST system for the coming years, failing which, the economy will fall prey to irrational market economics and high tax rate bogeys eroding basic and good economic governance.