The GST regime: The good, the bad and the puzzling | LME 55

The flavour of your popcorn can actually decide how much tax you pay for it.

If your bun is plain, it falls under the one tax slab. But add cream to it, and suddenly it’s in the increased slab.

Coconut oil is taxed at 5% but other hair oils at 18% – Confusing, right?

When GST was introduced in 2017, we were promised simplicity. But is it really?

Look, GST has simplified a lot of things, but it’s still incredibly complex and inconsistent.

At the latest GST Council meeting, Finance Minister Nirmala Sitharaman announced a bunch of rate changes and clarifications, and you'd think that would clear things up.

But nope, not really.

Let’s dive into why GST is still so confusing, how federalism is getting impacted, and explore some possible solutions.

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The GST confusion starts at the very classification of items. 

The food industry has one with the most complex GST rates .

Let’s say you go to a bakery,

Plain bread is tax free, but when you want to get toasted bread, it comes with 5% tax, and for biscuits or pastries, it goes up to 18%. 

You buy sweetmeats at 5% tax, but for sugar boiled confectionery, it is 12% and for sugar confectionery, it is 18%.  – confusing, right? But this is exactly how items are classified under GST.

Let’s say you are trying to make a simple bun-butter-jam.

The plain bun is, again, tax-free. Adding butter will cost you 12%, and jam? – another 12%.

Like unpacked pop corn at 5%, pre-packaged at 12% and caramel coated at 18%.

If pepper and raisins are sold directly by an agriculturist, there is no tax. If it is sold by a merchant, then it is taxed at 5%.

Take restaurants for instance, 

Initially, food served in AC restaurants were taxed at 18%, while non-AC outlets were at 12%.

Some restaurants would even turn off their ACs so they get a tax reduction.

Anyway, after widespread criticism, this was lowered to 5% – but with two little conditions (say sarcastically) – Input Tax Credit was removed, and hotels that have a room rent of Rs 7500 or more, should still pay 18% with ITC.

Not just these food items, we can see a bunch of such puzzling rates if we closely look at the regime.

The GST rate for car and two-wheeler seats is set at 28%. Other parts of automobiles, like engine parts and body components, are at 18% or 28%. 

And now the tax rate on selling used vehicles has been increased from 12% to 18%, but this only applies to dealers, not individual sellers. The tax is charged only on the dealer's profit margin after factoring in depreciation.

But here’s the problem: the higher costs might be passed on to the customers.

Mobile phones fall under 18% – one of the highest slabs. And the same government has been harping on going cashless and pushing for digital India.

But will tax the most basic device needed for digital India, a mobile phone, at 18%. It's not a luxury but a basic necessity for the livelihood of millions in India. 

The GST council has not even removed the 18% tax on life and health insurance policies. There was clamour for this to be removed but the council decided to postpone this decision. 

Building or owning a home has always been a dream for many middle-class Indians. But the GST on construction materials falls under higher tax slabs, with most basic materials like cement, iron, steel, electrical items, ceramic tiles, and paint being taxed between 18% and 28%. This, of course, adds to the overall cost of building a house.

In 2017, the new GST regime decided that all items be taxed under 5 slabs: 0%, 5%, 12%, 18%, or 28%. 

Not all businesses need GST registration. It depends on turnover:

• ₹40 lakh+ for goods

• ₹20 lakh+ for services

I am not suggesting the GST regime is all wrong. 

The GST rate on fortified rice has been lowered from 18% to 5% to make sure it's available through the public distribution system (PDS). Also, the GST council has extended 5% on inputs of food preparations meant for free distribution to the Economically Weaker Sections (EWS) under government schemes. 

In general, It has removed the double taxation on indirect taxes like Central Excise, Central Sales Tax and State VAT.

It has also made it easier to move goods between states and introduced standardized tax rates, helping reduce regional differences.  

The streamlined IT system and e-invoicing have simplified filing, cut down on bureaucracy, and encouraged more cashless transactions.

But one big complaint that’s come in is that the present GST regime is a blow to states and federalism.

How? 

The argument is that after GST, states lost their independent taxation powers. 

This means they have to seek permission from the Union government for any revision in the tax structure, except for a few items, like liquor and fuel. 

We saw that liquor shops were open even during the covid lockdowns, since these are the only means for state governments to generate independent revenue. And this centralisation of power is not just about the economy, but highly political. 

When GST was introduced, a compensation mechanism was put in place to help states recover any revenue loss. But this compensation is mostly funded by the Union government, which gives it a lot of control over state finances. The problem is, states often have to rely on the Union government for these funds, and delays in releasing compensation payments have caused financial strain. This not only limits state independence but also makes it harder for states to manage their budgets and projects effectively.

So what are the solutions to fix the GST problems? 

Does the GST structure have to be this complex?

Let me give you a quick international comparison.

This study by The World Bank group says that most of the countries that have implemented GST, have only one or two tax slabs, while India along with few other countries, have the highest number of slabs – that is 5.  

Not just that, India’s highest slab–that is 28%, is the one of the highest in the world. 

It’s clear that the first issue to fix is the complexity in the system. Over the past 7 years, the GST council has held 55 meetings and issued over 900 notifications, mostly in response to complaints for revisions. Yet, the system is still complicated.  

Experts suggest that introducing a simpler three-tier slab system — with high, middle, and low rates — could help clear up the confusion.

Plus, essentials like health and life insurance, mobile phones, at least basic ones can be placed at 0% 

And there can be more transparency in how total tax collected by the Union govt and ensure that states get their assured compensation on time.