Food for thought in GST

In the last parliament session, the union government said that the weighted average GST rate for 2023-24 was 11.64 percent.

A mere three sentences on popcorn in a longish press release after the GST Council meeting on December 21 overwhelmed public perception of what was once touted as a historic tax reform. The memes are spot on this time because they capture the frustration with the way the GST has evolved, a messy system that from a consumer’s standpoint defies common sense.

Some food for thought

If three tax slabs for popcorn, depending on packing and caramelization, were a bit too much, consider aerated beverages. If a consumer downs a cola, the tax and cess put together can go up to 40 percent. If it’s just soda, without the sugar, the tax is 18 percent. If one wants to keep it healthy and have just a fruit pulp beverage, the tax is 12 percent. Or, the healthiest of beverages, bottled water, we find the tax going up to 18 percent.

The case is not too different for sugar, which spans the exempt category for bulk purchases to 12 percent for sugar substitutes.

Food-related areas are where the complexity of the current GST architecture show up in a stark manner.

A bit lopsided structure

In the last parliament session, the union government said that the weighted average GST rate for 2023-24 was 11.64 percent. It is more than two percentage points lower than RBI’s estimate of a weighted average GST rate of 14.4 percent when the tax was first rolled out in 2017.
The weighted average rate of 11.64 percent can be misleading. The government also told the Parliament that about 70-75 percent of the GST revenue is collected at the 18 percent slab. It’s this slab, which accounts for most services such as mobile phone payments, that holds up the system.

The 28 percent slab contributes another 13-15 percent of the GST revenue. In effect, up to 90 percent of the revenue come from two slabs. That leaves four other slabs which account for a small portion of the revenue, but a large amount of confusion.

Multiplicity of rates

In an ideal world, there would be a single GST rate, eliminating confusion and the need to lobby. Since this scenario is not plausible, the sensible way forward is to move the system into fewer slabs.

That was the hope of a committee, headed by former chief economic adviser to the finance ministry Arvind Subramanian, which worked on a revenue neutral rate in 2016 prior to the GST rollout. However, the hope of the committee hasn’t been realized and we now run the risk of having another slab created at 35 percent for items such as cigarettes.

Crying out for reform

GST evolved over the span of multiple central governments represented by most major political parties. It’s here to stay and there are no serious questions on its efficacy. The potential however will not be realized if the GST Council, where the centre and states are represented, does not figure out a way to reduce the number of slabs.

There’s no point in blaming bureaucrats for the current messy system. GST came about because of the political will of major political parties. It’s the politicians who need to take responsibility for reforming GST.