Mains Practice Questions

Introduction:

The Goods and Services Tax (GST) introduced through the 101st Constitutional Amendment Act 2017 is a comprehensive indirect tax on goods and services in India. Over time, GST faced challenges such as multiple rates, inverted duty structures, and high compliance costs.

• GST 2.0 simplifies the system by adopting a two-tier structure with 5 percent for essential items, 18 percent for standard goods, and a 40 percent demerit rate for luxury and sin goods, making the tax regime more efficient, transparent, and growth-oriented.

Body :

Rationale Behind the Recent GST Reforms in India:

• Lower Prices, Higher Demand: Reduced GST rates make goods and services cheaper, increasing household savings and stimulating consumption, especially in essential and employment-intensive sectors.
  • The reforms are expected to stimulate domestic demand, encourage formalization of the economy, and contribute to long-term fiscal stability
• Support for MSMEs: Lower input costs on items like cement, auto parts, and handicrafts make micro, small, and medium enterprises more competitive and promote entrepreneurship.
• Ease of Compliance: The simplified two-rate structure reduces tax disputes, accelerates decision-making, and lowers compliance costs for businesses.
  • Evidence from past reforms suggests that lower rates combined with better compliance can increase GST collections in the medium term.
• Wider Tax Base : Simpler rates encourage voluntary compliance, broadening the tax net and potentially improving government revenues over time.
• Support for Manufacturing: Correcting inverted duty structures enhances domestic value addition, strengthens export competitiveness, and boosts the Make in India initiative.
• Social Protection: Exemptions on insurance and essential medicines strengthen household security and improve access to healthcare, addressing equity concerns.
• Consumption and Production Efficiency: By eliminating cascading taxes and rationalizing rates, GST 2.0 promotes resource allocation efficiency across sectors.

Issues have Emerged in the Course of GST Reforms

• Fiscal Revenue Shortfall: The reforms entail significant revenue loss, with estimates around ₹48,000 crore annually, primarily due to reduced rates and zero-rating of many goods.
  • This creates fiscal pressure on both the central and state governments, forcing them to either cut expenditures or increase borrowing.
• Input Tax Credit (ITC) and Cascading Tax Issues: Exemptions and zero-rated supplies restrict eligibility for ITC, leading to cascading taxes on inputs.
• Rate Structure and Classification Ambiguities: Simplification to fewer slabs helps but classification disputes persist over which goods fall under given categories.
  • Special rates and the new 40% slab for sin goods increase complexity in areas such as luxury and harmful goods taxation.
• Compliance Complexity and Technological Integration: Although slabs are rationalized, businesses face transitional compliance burdens, including recalibrating pricing, billing systems, and ERP updates.
  • MSMEs may lack the capacity to swiftly adapt, facing higher compliance costs and learning curves.
  • The GST Network (GSTN) and government leverage technologies like AI and data analytics to improve compliance and detect evasion, but frequent rule changes still complicate adherence.
• Enforcement and Dispute Resolution Delays: The GST Appellate Tribunal (GSTAT), essential for resolving disputes quickly, remains non-functional or delayed in several states.

Measures to Strengthen GST 2.0 Reforms

• Strengthen GST Administration: Enhance the GST Network (GSTN) and use AI/data analytics to improve compliance monitoring and reduce evasion.
• Support MSMEs: Provide capacity building, simplified compliance, and technological assistance to help small businesses adapt to new slabs.
• Monitor Fiscal Impact: Use targeted fiscal measures or liquidity management to offset revenue shortfall without compromising social and infrastructure spending.
• Seamless Input Tax Credit (ITC) Mechanism: Ensuring a frictionless ITC chain prevents working capital blockages for businesses.
  • Linking ITC eligibility with real-time invoice matching can reduce fraud while maintaining liquidity.
• Promote Awareness and Training: Conduct taxpayer education campaigns for businesses and consumers on new rates and compliance procedures.
  • Expand digital invoicing, e-way bills, and automation to reduce administrative burden.

Conclusion:

The Next-Generation GST reforms represent a bold step towards building a simpler, fairer, and future-ready tax architecture. By reducing the tax burden on citizens and empowering farmers, MSMEs, women, youth, and middle-class families, GST 2.0 lays the foundation for inclusive prosperity, fiscal resilience, and global competitiveness.