Is GST a broken promise?

Financial Express, February 12, 2025

By Pradeep S. Mehta and Tasmita Sengupta,

A well-structured, targeted tax relief system is crucial to enhance economic inclusivity, stimulate demand, and position India as a globally competitive market.

As Benjamin Franklin rightly said, “In this world nothing can be said to be certain, except death and taxes.” India’s goods and services tax (GST) was introduced as a landmark reform to simplify the country’s complex tax system, eliminate cascading levies, and create a unified market.

However, years later, it has deviated from its original promise, entangled in inconsistencies that burden businesses and disproportionately impact consumers — especially the middle class and the poor. With the Union Budget 2025 under parliamentary discussion, there is an urgent need to recalibrate the GST into a system that is truly rational, equitable, and growth-friendly.

India’s post-pandemic recovery has been K-shaped, benefitting the wealthy while leaving the most vulnerable behind. The growing economic divide raises a critical question: Does India’s tax system aim to uplift or further burden the disadvantaged? According to a sound research report, the poorest 50% contribute a disproportionate 64.3% of the total GST revenues, while the top 10% pay just 3.9%. Rather than promoting redistribution, India’s tax structure has deepened inequality, with corporations paying far less than individual taxpayers, compounded by the regressive nature of indirect tax, precisely GST.

By 2020, the income share of the bottom 50% had plunged to just 13% of the national income, while they owned less than 3% of the country’s wealth. The stark reality? Nearly 70% of Indians cannot afford a basic, nutritious diet, leading to an estimated 1.7 million deaths annually due to diet-related diseases, underscores the report.

At the heart of GST’s challenges lies its inconsistent tax classifications, often bordering on the absurd. According to the 55th GST Council meeting, there is an increase of GST on fortified rice — a crucial intervention to tackle malnutrition is one such case. Higher tax rates on such essentials make them less affordable for those who need them the most, contradicting government efforts to address food insecurity.

The recent popcorn controversy exemplifies further regulatory mess as unpacked, unlabelled salted popcorn is taxed at 5%, its pre-packed variant at 12%, and caramel popcorn at 18% under the sugar confectionery category. The outcome? Artificial market segmentation, compliance burdens for small businesses, and a direct impact on consumer prices — all at odds with GST’s promise of a “good and simple tax”.

This isn’t an isolated case. Recall the infamous paratha vs roti debate, or the tax disparities between packaged and unpackaged lassi. Such inconsistencies have always fuelled avoidable litigation, created confusion, and weakened public trust in the tax regime. It further hits the middle- and lower-income groups the hardest, where a small price hike on household essentials impacts household budget significantly.

The classification chaos extends beyond nutritional food items and snacks. High and inconsistent taxes on second-hand vehicles, or on health insurance schemes limit affordability and market fluidity. Such tax distortions ripple across industries, affecting demand and competitiveness.

Even the hospitality industry advocates for a reduction in GST rates for hotel rooms and restaurants, besides tax incentives, in order to boost sector viability. As a result, there will be a lowering cost of operations and improved affordability for travellers. This can attract more investment into the sector, creating more job opportunities and thus contributing to economic growth. A well-structured, targeted tax relief system for essential goods is crucial to enhance economic inclusivity, stimulate domestic demand, and position India as a globally competitive market.

The GST must return to its core objective — simplicity, fairness, and efficiency. The government must take bold steps to correct the distortions. India’s multi-tiered GST structure needs rationalisation. A simple system with lesser slabs, as seen in countries like New Zealand and Singapore, would eliminate unnecessary complexities, particularly for small businesses that struggle with compliance costs and rent-seekers. Introduction of GST help desk, chatbots, and online training modules for these businesses can help in understanding and complying with GST regulations. In short, creating a more inclusive tax policy can prevent economic disparities from widening further.

Lower tax rates on research and development investments and innovation-driven industries will not only spur growth but also attract foreign investment, making India a manufacturing and services powerhouse. Encouraging ethical business practices through tax relief for environmentally and socially responsible companies can drive sustainable economic development. Artificial intelligence-driven compliance mechanisms can reduce the bureaucratic red tape, allowing businesses to focus on expansion rather than cumbersome tax filings.

India’s GST regime needs a fundamental shift — from arbitrary classifications to a streamlined, transparent, and growth-oriented framework. The tax system should foster economic inclusivity rather than perpetuate inequalities. Instead of addressing individual cases in isolation, moving to a broader category or fewer slabs can eliminate ambiguities. Further, by aligning with global best practices and reducing compliance burdens, the GST can truly live up to its original promise — a reform that benefits all, not just a privileged few.

The authors work for CUTS International, a global public policy research and advocacy group.