GST kills Gabbar Singh Tax

FertilisersIn Indian economic history, few reforms have been as transformative — and mischaracterised — as the Goods and Services Tax (GST). Critics dubbed it the ‘Gabbar Singh Tax,’ likening it to a dreaded dacoit extorting money from helpless citizens, which is a gross misrepresentation. The true ‘Gabbar Singh Tax‘ was the chaotic system that preceded GST, with various indirect taxes like excise duty, VAT, and service tax creating a tangled web that burdened businesses. Trucks spent excessive time at check posts due to bribes and bureaucracy, raising costs and causing price hikes for consumers. Contrary to being arbitrary, GST represents a rational and growth-oriented reform that simplifies taxation and reduces inefficiencies, ultimately strengthening the economy. Its benefits are far-reaching and noteworthy.

One common myth about GST is that it has increased the tax burden on the average person. In reality, it has lowered tax rates on daily essentials for the first time in India’s history. Essential items like spices, rice, and wheat are taxed lower or exempt, while goods such as tea, milk powder, sugar, and edible oils now attract a GST rate of just 5%. Daily products like hair oil and tooth powder also face lower taxes, and home appliances have seen rates drop from over 30% to 18%. Agricultural goods, including fertilizers and tractors, are more affordable, and key inputs like coal are taxed lower as well. Ultimately, GST has led to tangible savings for consumers.

*Other than pre-packaged and labelled
**Different States may have different states owing to different VAT rates.GST has transitioned from a mere tax mechanism to a significant policy lever across various sectors. In the electric mobility and renewable energy realms, GST has enabled growth by applying a low rate of 5% on EVs and solar panels, aligning with India’s renewable energy goals. The ‘One Nation, One Tax’ framework has revolutionised logistics by reducing truck travel time by up to 30% and minimising inter-state delays. As a result, logistics costs declined by 0.8-0.9 percentage points of GDP from FY14 to FY22. India’s position in the World Bank’s Logistics Performance Index improved from 44th in 2018 to 38th in 2023, and in international shipments, it rose from 44th to 22nd, driven by automation and digitalisation under GST.

A thriving economy needs strong tax revenues to support essential services like infrastructure, healthcare, and education. The Goods and Services Tax (GST) has exceeded expectations, with revenues surpassing ?20 lakh crore in FY 2023-24, up from ?7.19 lakh crore in FY 2017-18. In FY24, GST collections reached 3.25% of GDP, an increase from 3.08% in 2018-19. Although the suggested Revenue Neutral Rate (RNR) was 15.3%, the average GST rate has decreased to 12.2% in 2023. GST has significantly improved tax buoyancy from 0.72 to 1.22, while state revenues remain strong at 1.15 despite the end of compensation. This success is attributed to doubling taxpayer numbers from 60 lakh to 1.4 crore, highlighting the benefits of a simplified tax regime that encourages voluntary compliance.

India’s Micro, Small, and Medium Enterprises (MSMEs) have greatly benefited from introducing GST, which replaced a fragmented tax system. The exemption threshold was raised from ?20 lakh to ?40 lakh for goods-based businesses, and the Composition Scheme allows for a fixed tax rate with minimal paperwork. GST has facilitated quick bill discounting and easy loans through the Trade Receivables e-Discounting System (TReDS), assisting many MSMEs. While some critics labelled it the ‘Gabbar Singh Tax,’ GST has resulted in lower taxes on essential goods, improved logistics, more substantial government revenues, enhanced state financial independence, and a simplified system for small businesses.

GST has been transformative, but its evolution into GST 2.0 requires reforms for better efficiency and fairness. The current five-rate structure (0%, 5%, 12%, 18%, 28%) complicates compliance. A simplified three-rate system— merit rate for essentials, standard rate for most goods, and demerit rate for luxury items—could enhance clarity. The GST Council is considering merging the 12% and 18% slabs to streamline taxation and align India with global best practices like the EU’s VAT model. Improving dispute resolution is essential for efficiency and taxpayer trust. A faceless assessment system for audits and refunds can reduce delays and bias. Introducing a vendor rating system can help manage ITC risks. The upcoming GST Appellate Tribunal (GSTAT) should be expedited to clear pending cases, alongside a centralized tribunal for Advance Rulings to ensure consistency across states. For MSMEs, which contribute 30% to India’s GDP, GST has provided benefits but also challenges, such as delayed ITC refunds. GST 2.0 should improve tools like ‘GST Sahaj’, automate ITC reconciliation, and relax ITC restrictions for employee and infrastructure expenses. Simplifying compliance through paperless invoicing and quarterly returns will further support small businesses.

Utilising GST data is essential for better policymaking. With over 1.4 crore taxpayers, the GSTN can provide valuable economic insights. Establishing a GST Data Analytics Unit using AI can identify inefficiencies and guide reforms, while quarterly anonymized reports will enhance transparency. Its impact on lower-income groups must be considered to make GST more inclusive. Although it lowers taxes on essentials, GST 2.0 could introduce a Dynamic GST Relief Card—Aadhaar-linked—to provide real-time more rebates on essentials. These refinements will reinforce GST’s role in India’s economic growth, making it simpler, more inclusive, and ready for the future, as the country aims for a VIKSIT BHARAT by 2047.

The contributor is Professor of Finance – XLRI Xavier School of Management and BJP Leader.