Introduction
The Goods and Services Tax (GST) was a landmark reform in India’s indirect taxation system, introduced to streamline multiple state and central taxes into a unified framework. Despite its objectives of simplification, transparency, and economic efficiency, the GST regime continues to face challenges such as multiple tax slabs, compliance burdens, and exclusion of key items like petroleum products, electricity, and alcohol.
As India aims to strengthen fiscal federalism and boost ease of doing business, rationalizing GST rates and broadening its base have become pressing policy imperatives.
GST Structure at a Glance
India’s GST has a multi-rate structure:
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0%: Basic necessities like fresh fruits, vegetables
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5%, 12%, 18%, 28%: Common slabs for goods/services
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+ Cess: On items like luxury cars, tobacco, aerated drinks
Excluded from GST (currently taxed by states):
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Petroleum (Crude, Petrol, Diesel, Natural Gas, ATF)
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Alcohol for human consumption
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Electricity
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Stamp duty on real estate transactions
Key Issues with the Current GST Structure
1. Multiple Tax Slabs
The presence of five tax slabs (plus cess) adds complexity, causing:
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Classification disputes (e.g., roti vs. paratha case)
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Inverted duty structure in some sectors (inputs taxed higher than outputs)
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Administrative burden on small businesses
2. Excluded Items Create Tax Cascading
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Items like fuel and electricity are critical inputs across industries
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Their exclusion breaks the input tax credit chain, leading to higher production costs
3. Revenue Dependence on Cess and Compensation
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Reliance on cess for high-revenue items like luxury goods undermines predictability and vertical devolution
4. Frequent Changes and Lack of Certainty
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Rates and rules are frequently tweaked, eroding trust and increasing compliance costs
5. Lack of Uniformity Across States
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Different interpretations and enforcement mechanisms by state authorities reduce the “one nation, one tax” spirit
Need for Rationalization
✅ Economic Efficiency
A simplified rate structure reduces tax cascading, litigation, and promotes formalization of the economy.
✅ Revenue Stability
A wider base with fewer exemptions increases revenue buoyancy without raising rates.
✅ Ease of Doing Business
Fewer slabs and a unified compliance portal reduce the burden on MSMEs and startups.
✅ Enhanced Cooperative Federalism
GST Council consensus on inclusion of excluded items strengthens the Centre-State fiscal partnership.
Why Are Key Items Still Excluded?
| Item | Reason for Exclusion | Revenue Implication |
|---|---|---|
| Petroleum Products | States fear revenue loss and loss of autonomy | High excise/VAT revenues |
| Alcohol | Major source of state revenue | Politically sensitive |
| Electricity | Complicates input tax credit chain | Risk to state-owned DISCOMs |
| Stamp Duty | Constitutionally under states | Linked to land rights and state income |
These exclusions reflect a reluctance of states to surrender fiscal autonomy, especially in high-revenue categories.
Reform Proposals and GST Council Discussions
1. Merging Slabs
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Proposal to reduce slabs from 5 (0, 5, 12, 18, 28) to 3 (likely 5, 15, 28)
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Consideration of merging 12% and 18% into a mid-range slab
2. Inclusion of Petroleum Products
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GST Council has discussed this since 2019
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Inclusion would allow input tax credit across the economy
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Gradual inclusion starting with natural gas or ATF (aviation turbine fuel) suggested
3. Review of Exemptions
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Many items are exempted due to political pressure or lack of clarity
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Periodic review of exemptions to widen tax base recommended
4. Simplification of Compliance
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Steps like auto-populated returns, e-invoicing, and faceless assessments to reduce friction
Challenges Ahead
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Political Consensus: Inclusion of excluded items needs GST Council unanimity, often blocked by states
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Revenue Protection for States: States worry about loss of VAT revenues
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Inflation Risk: Including petrol/diesel under GST may cause initial price fluctuations
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Infrastructure for Real-Time Credit Transfers: Needs robust back-end IT systems (GSTN)
The Way Forward
🔹 Gradual Slab Merging
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Aim for 3 or max 4 slabs, with predictable, neutral rates
🔹 Phased Inclusion of Excluded Items
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Start with natural gas, followed by ATF, then diesel/petrol
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Provide compensation mechanisms for states for 3–5 years
🔹 Strengthen GST Council Transparency
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More open communication on decisions, timelines, and deliberations
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Publish impact assessments of proposed reforms
🔹 Empower GST Secretariat
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Give it permanent institutional backing and capacity for research and data analysis
🔹 Enhance Public Communication
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Educate citizens and businesses on why reforms matter—to garner support and reduce resistance
Conclusion
GST is a work in progress. While it has streamlined indirect taxation in India, its true potential remains unrealized without rate simplification, base widening, and inclusive governance.
As India gears up for its Viksit Bharat @ 2047 vision, a rationalized GST regime is essential for:
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Fiscal sustainability
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Competitive manufacturing
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Transparent and efficient governance
It’s time for India to move from “tax reform” to “tax transformation”—from complexity to clarity, and from exclusion to equity.