GST 2.0: Overview and Structural Changes

The central government has introduced GST 2.0, aiming to simplify the rate structure and address issues like the inverted duty structure in textiles and fertilizers. The revision has reduced classification disputes by placing all food items under a 5% rate slab, eliminating the previous 5% and 12% slabs.

Objective and Challenges

The fundamental goal of GST reforms is to increase the GST tax-to-GDP ratio by expanding the tax base, improving compliance, ensuring a duty trail from raw materials to retail, and including all economic sectors within GST. However, the goal has not been fully realized.

• The pre-GST tax-to-GDP ratio was 6.2%, which fell to 5.8% post-GST rationalization due to a reduction in duty incidence from 14.8% pre-GST to 10.5%.
• The GST tax-to-GDP ratio was expected to rise to 7.2%, but it remains stagnant between 17% and 18% over two decades.
• Efforts are now shifting toward enhancing personal income tax as a direct tax measure.

Proposed Measures for Improvement

• Increase duties on sin goods such as cigarettes, online gaming, pan masala, and luxury cars.
• Consider raising the duty on gold and jewelry from 3% to 5%.
• Re-assess exemptions, such as the recent health insurance exemption, which blocks input tax credit on agent commissions.
• Transition exempted items to a 1% or 2% rate to familiarize manufacturers with the GST regime.

Issues with Rate Rationalization

The GST rate rationalization still imposes differential tax rates based on value limits, which are conceptually flawed and create administrative distortions.

• Products like apparel and footwear are taxed differently based on value, discouraging expansion in labor-intensive sectors.
• All textiles and footwear should be uniformly taxed at 5%, and imported inputs should be exempted to enhance competitiveness in international markets.

Land and Real Estate in GST

Incorporating land and real estate within GST could be a significant reform, eliminating current distinctions between taxed construction services and exempt ready-made properties.

• This inclusion will create a self-policing input credit chain and curb black money generation.
• It is legally feasible to treat land sales as the sale of the right to land as a service and apply GST.
• The reverse charge mechanism can apply where GST is paid by the service provider (developer/builder) instead of the property buyer.

Revenue Implications and Consensus Building

Though GST revenue gains might be minimal due to input duty credits, better transaction reporting at true values will enhance income tax revenues.

• States can be assured of continued stamp duty revenue, building consensus for reform.
• A strong public narrative on reducing corruption and black money could foster agreement.

Conclusion

GST 2.0 represents a crucial reform but requires further adjustments. The inclusion of land and real estate in GST could drive significant economic reforms.