GST Overhaul Aims to Lift Spending, Cushion Trade Shocks

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Hello and welcome to The Core Report's weekend edition. So a little bit of history, the goods and services tax was started in the 1st of July 2017. It subsumed a lot of intra-country taxes including central excise, sales tax and so on and so forth.

It also allowed among other things a free movement of goods within India, which was not the case earlier, though it could be, for example, experienced in the European Union, which were actually disparate countries. So since then, we've come a long way and actually not, because if you look at it, it's only eight years and now we've announced or rather seen the announcement of a fresh round of reforms. The term reform is interesting once again because one would assume that a lot of time has passed between the original act and now, but it's only eight years.

So in the speech that the Prime Minister Narendra Modi gave on the 15th of August at the Red Fort, that's Independence Day, he essentially talked about a new generation of reforms, not the exact words, but basically that goods and services tax was going to be changed, revamped again, but with a clear focus of bringing down prices for people who are at the lower end of the consumption scale. So what that has meant is really that a lot of goods that would be typically taxed, now there are four stages of GST, 5%, 12%, 18 and 28. A lot of the 12% will go to 5%, a lot of some of the 28 will go to 18 and those that were in 28 will really remain and become more aligned to sin taxes as we call them or luxury goods.

So we'll talk about all of that later. The question that really I'm asking today is, one is, I mean, a little recount of the history so far and where have we come and how far have we come in goods and services tax. It is an internal tax in the context that we are talking about.

Secondly, what needs to be done, even as we try and understand the pathways to implementation, because GST is something that has to be put out or put together in consultation with states. So while the federal government or the central government may decide or say something, it's not an act of law or it's not practised till everyone agrees. So there is some slip between the cup and we'll come to that too.

And finally, what is the unfinished agenda? Because even after all this, there will be much to do. And we will talk about that.

To talk about both of these things, I'm joined by Prashant Agarwal of PricewaterhouseCoopers or PwC, and I'm also joined by Rohit Jain of ELP. Thank you both for joining me. So Rohit, let me start with you.

So my first question really is, from 17 till now, a very quick recap of what we've achieved and what is the distance that we've travelled?

Rohit Jain

Thank you for inviting us. And this is a very important moment for us, all of us in GST era. GST 2.0, we've heard a few months back, but getting into this sort of address at the Independence Day by the Honourable Prime Minister is a big moment. We'll talk about what is likely to be in terms of reform. But your first question is that how is the history so far in GST law? When GST got implemented, it is one of the biggest tax reform in our country.

More than 30 taxes have subsumed in one levy called GST, and which is most importantly uniform across the states. So what have we achieved in last eight years is that uniformity. Even after eight years, while GST Council decides the issue, there have been no disconnect amongst the levies in different states.

States have also been given the power to, as part of a GST Council, to also levy SGST, which is a state subject. But having said that, we have achieved a uniformity across the states, be it in the tax rate, be it in the tax filing and compliances, be it in the availability of ITC. So the big takeaway and the achievement, I would suggest a uniformity.

Second big achievement is the digitalisation. Today, every written filing is digitalised. Unprecedented number of e-invices have now been raised in the country, which is one of the biggest achievements as part of a GST transition.

And that has helped two things. One, the tax compliance has been slightly smoother. While it can be better, but it has helped a lot of things in terms of digitalisation.

But the second big thing which I would put it is that now the use of new high-end technologies of AI and other things, be it by the tax assesses or by the tax regulators, become quite easy because of the digitalisation. So it is a second big achievement in my view. One is a uniformity and the digitalisation.

Okay, Prashant, what in your mind are the milestones so far?

Prashanth Agarwal

Thanks for having me. I think adding to what Rohit has already alluded towards, the other important pieces are the growth of the taxpayers. I mean, what we started in 2017, we have almost reached 1.5 crores of taxpayers. We have also looked at compliances, the impact of invoicing, etc., which Rohit talked about. The impact has been that we have doubled the number of returns we have filed before invoicing, after invoicing, per se, which means compliance has really kicked in. We've also seen the revenue growth.

I mean, that was one of the objections that was raised by the states at all points of time while the consensus was being brought up. And we saw how the revenue, which was less than 1 lakh crore when we started off, has almost crossed 2 lakh crores consistently. And this year, the average revenue is almost 1.96 lakh crores, clearly shaping up whatever great ideas that the government has now to put in, of course, in consensus with the state. This impetus of compliances, revenue coming into play has really helped the government to reach this stage. And, of course, now, some of the cess, like compensation cess, which was brought in to support the states and now even after COVID for the loans, going away with it would make a lot of difference as we go around. So I think the milestones for me would be increasing compliances from where we stood, where we are.

You are looking at better revenue growth rate for each of the state governments and overall from the central standpoint. And that is really kicking up the new era for all of us, hopefully, in very near future.

So we started with four categories of goods and service tax. Now, if you were to equate this to value added tax, like in some other countries, usually most countries who move towards this kind of taxation system move to one slab.

Now, we started with four. And now we are seemingly, with the Prime Minister's announcement, moving towards two. So would this be, Prashant, let me start with you.

Is this something that was natural progression? Or is it because of the lessons that we've learned about facing or having to face such disparate categories?

Prashanth Agarwal

So we've discussed this, Govind, earlier as well in your podcast, this issue of rate rationalisation. It's been something which has been a subject matter of discussion since the inception, because we should remember, GST was an act of compromise. Not the ideal law was brought in because everyone has to be accommodated.

And at that point of time, late Mr. Ranjithly had also made the statement that as we move along, as the confidence of the states come into play, there is obviously a need to rationalise the number of rates we are looking at. So I would say that from where we stood, and if we move to the two slab rate and get away with the 28% and the 12% rate, that would be a very good structure. In our kind of a democracy, you have to look at India as multiple countries.

You can't equate it to any of the European countries or the Middle East countries where you may have one rate per se. You will have to live with at least two rates, I would say, given our demographic and the way we are in terms of the benefits that we need to provide to our common man as well. So you will probably have, this should be probably the rates how the structure would look like, where you have a lower rate for common man products, which is 5%, 18% in general.

And of course, some of the products which are so-called sin products, you would want to have a higher rate of 40% on that.

So Rohit, you know, while natural progression is something that we all live with, but I mean, the intuitive question really is, couldn't this have been done earlier? Because we've been now grappling with it even formally, in terms of the issue of reduction of slabs for at least a couple of years, if not more.

Rohit Jain

I think going to ask one question pertinent in terms of whether it's a natural progression or a learning. I would put it across natural progression. Can this be achieved earlier?

No. Within a decade of implementation, we are getting into two rates slab structure. It's itself is an achievement, I would put it.

But it's not only the natural progression, I would put it, it's a learning as well, given the fact that we have seen multiple disputes on the issue of classification. It was not envisaged at the time of implementation that we will also have a dispute on classification. Now, if you see what is proposed also in the structure, there are three pillars of the structure.

One is the structural reforms, rate rationalisation, ease of doing. Structural reforms also had three points, which are also on the rate. I would put it, actually, there are only two pillars, structural reforms and rate rationalisation, one, and ease of doing.

And why is, therefore, this is so important as a rate issue? Not only a natural progression, but it's a dispute. We had seen the controversy on popcorn, whether it's 5% or 12%.

We have seen the controversy on 12% versus 18% on solar. We have seen so many disputes, which have arisen in last eight years, where I would put it almost 35% of disputes in our country on GST is on account of a classification. What should be the rate of tax applicable?

And if we want to give that as an ease of doing, we want to give certainty to the taxpayer, we wanted to give clarity to all our businesses in India, we have to avoid these disputes. And this is a big learning, I'm sure it would have been got as a lesson while rationalising the rate and getting into two slabs.

So, let me pick up on the popcorn example, Rohit. So, 5% GST for loose popcorn, 12% for pre-packaged, if I remember that correctly, and 18% if it's caramel coated, the kind you would get in a PBR or something. What is the logic?

I mean, this is more for people who are watching and trying to understand what was the logic even driving something like this?

Rohit Jain

See, what has been considered that all essential agricultural produced, we had a concept of 5%, which is a lower rate, which is for the masses. Then we have got into a branded category, which is anything which is branded, all food products which are branded. The understanding is that there is something more than it's only for the masses.

The branded products can be only sourced by people who can afford those sort of branded products. Therefore, the rate of tax is 12%. And unfortunately, this caramel distinction is quite different, because what is the predominant nature?

Is it a popcorn or it's a sugar? And that sugar carries a high rate of classification. And under the HS code, we have a different classification for a basic popcorn and the sugar coated products, which contains added sugar in that.

And that has gone to the controversy of getting into 18%. Ideally, it should not be. Yes, 5% and 12% understandable, given the mass product consumption and a branded one.

But this sugar coated and caramel and all 18% is definitely unwarranted. And this is exactly the dispute that we want to avoid now, when we get to a rate rationalisation.

And I'm going to come to the Prime Minister's latest announcements on 15th of August. But Prashant, you know, again, if I were to continue with the popcorn example, what is it that we should be doing?

Or how should we be thinking of these things so as to prevent us falling into this, you know, this chakra view in future? And, you know, making it simple, but including for consumers like you and me?

Prashanth Agarwal

So I think, on a lighter note, I would say some of these disputes are necessary for me and Rohit to make a living as well. So I'm not very sure whether this will completely go away or not. But I think Rohit has very well put it.

The reason has been, I think, ancestrally from a VAT regime standpoint, the rates have come out in the same manner. They used to think that there is a lower segment, which is the unorganised sector, not branded, lower rate, branded higher rate. And then you have plus plus, which is supposed to be luxury and hence 18%.

Hopefully, more and more sanity will prevail now, which basically means that as the economies get more and more organised, I guess these issues should reduce significantly. Will they go completely? I think it never happens, given the scale and size we're talking about.

But largely speaking, with not having multiple rate slabs, this whole issue would dilute significantly. I think just one more point I would want to make on the earlier point that you were talking to Rohit on. Why now?

Why not earlier in terms of this rate? I think every good idea has its own time. And the time was right now.

If you see Govind last time around in the budget they had brought in to reduce the income tax slab rate to ensure the middle class gets money in their hand. Now, with the GST rates again, the idea is to give impetus to the consumption story. And that's what would happen, hopefully, because larger rate of 28% on television, AC refrigerators, which are now a common man product rather than anything else.

If it goes to 18%, which should help the economy and making it more reachable to all masses per se. And same would happen if they are saying 99% of the products from 12% will move to 5%, which means, ideally speaking, it's a mini stimulus to the economy to help it really up in terms of the consumption start of the story. And probably the numbers will show it in that manner.

And we also have elections coming up. So that's something to park somewhere in the back of the mind. But anyway, let's keep that aside for now. So you talked about 99% moving from 12 to 5%, 90% from 28 to 18 is what we understand from the reports that we've seen. So my question is, how is this going to look like from a revenue point of view, Prashant, first you and then I'll come to Rohit, because you've talked about 190,000 to 200,000 crore consistent, or somewhat consistent flow in terms of revenues. Could this shift things around?

Prashanth Agarwal

So I think the government is waiting on two things. One, in terms of the reduction in revenue, whatever the news report suggests, it could be anywhere between 43,000 crores to 50,000 crore, that is the number that has been talked about. What the government has realised, and at least we have seen the trend, they have been very conservative in terms of their numbers from a budgetary standpoint, and they've been able to obviously do better than them.

And that's credit to them for that purpose. Our assessment is that that is around 0.1% of GDP that we're talking about in terms of the revenue loss. But what they are really banking on, with this and the income tax benefit that have come in, hopefully in the H2 of FY26, you would see a much bigger play on the consumption story.

And hopefully that would more or less overall, whatever the revenue loss we are talking about, from a GDP standpoint, and if it can add 0.2 or 0.3% of the GDP, which is more on a consistent revenue that you're looking at, that's much bigger opportunity and objective that the government would meet by reducing these gaps. So they are able to simplify the loss for the country and for the companies to invest in. And secondly, they are able to put more money for consumption.

So both sides are in a way taken care of if this happens.

Rohit, where are you on the figures? And of course, the larger argument for reducing taxes is obviously that there will be more consumption and eventually it should pick up again. But how are you seeing that right now?

Rohit Jain

I would want to bring attention to everybody's, the new word coined in the press release, aspirational goods. Till date, we have always heard called essential goods. Now it is essential and aspirational goods.

In our country, in the rural areas, even today, a refrigerator and air conditioning is a dream. And therefore, these are all aspirational goods that many of our people have. And if they want to achieve that aspiration of the people to affordability of these goods, which will directly lead to a consumption story.

So you are seeing, this is the first time we have seen in any press note, the word been aspirational goods. And that's the real, I think, logic behind reducing the rate from 28 to 18%, even on the white goods. What was thought of luxury till date, being a 28%, now become aspirational.

And that's a really mindset shift. And that mindset shift, according to me, is a big, big thing for our country, because that will lead to more consumption. That will give the impetus to the economy.

But the most important, our own target of $30 trillion economy by 2047. All of these steps are mandatory. I would put it, while the history suggests that reduction in the rate of tax always improved the collection.

But even if it is a lesser collection, even if it is a slightly revenue loss for the exchequer, this is still a worth a move. That if we can improve our consumption story, that's the step in the right direction is what I would put it.

And are you also seeing a 40 to 50,000 crore hit because of this, as in when it goes into?

Rohit Jain

Short term, yes, I believe the short term there would be a hit. 12% to go into 5%, 28 to 18% is a big, big reduction in the tax rate. There is going to be a short term pain.

But I'm 100% sure this is going to be a long term gain for the country as a whole.

Okay, let me quickly touch upon the procedure. And Prashant, let me come back to you. So, you know, so the Centre through the Prime Minister has expressed his desire to bring down the rates.

However, there is a process going forward, including the meeting of the GST Council, which will happen next month. So walk us through very quickly, what did it take for these prices to actually, or these rates to actually go into force?

Rohit Jain

Yeah, so I think, very important steps. Sorry, I'll go ahead. So very critical now that anything as a decision in the GST needs to be done by GST Council.

That's the key step here. And fortunately, that our Prime Minister has already stayed the deadline of Diwali. That means we literally have one and a half months, or two months to really work out till Diwali.

Now, if that be the case, what is already in media, there is going to be a two GST Council meetings of two long days meeting. That's a big one with a one meeting of two, two days continuously. That means there is a big agenda, there is big ground to cover.

And therefore, there is likely to be two rounds of GST Council meeting. Once the GST Council meeting, GST Council approves the new rate structure, then it will go to the effectively by way of a notification. This will get notified.

So post GST Council meeting, the rates can be notified only by way of a notification. But any change in the law, in terms of procedural aspect, in terms of some structural changes, requires a legislative amendment, which can only be done by the parliament. And thereafter, it will go to the state assemblies.

So our expectation is that the rate decision will happen in next two meetings that will get implemented through a notification and before Diwali, because Diwali is something which is the highest consumption for these aspirational goods. And if they need to get this notified, they have to notify before Diwali, so that the new rate structure gets applicable. And legislative changes will happen on the 1st of February, when we have the budget, budgetary session.

Thereafter, it will go to the state assembly. And sometime in the 1st April or 1st May, those will are likely to get notified.

So, Prashanth, how are you seeing the, you know, states have a big stake in this, because they earn the revenue or it goes back to them as well. Do you see them playing along? Because the 40 to 50,000 crore hit is obviously going to be hitting the states too in their proportion.

Prashanth Agarwal

Yeah, so I'll also try and answer what you asked earlier on the 40,000 crore, how that number actually comes out, if you allow me a minute on that as well. Sure, sure. So the 12% rate generally has around 5% of the revenue.

And, you know, if it reduces by 7%, most of it would actually speaking that will have an impact. The other is on the 28% rate, which is where again, you have around 11% of the total revenue coming in from the government standpoint. And next, you are talking about compensation sets, which is another 10% is what we understand put together.

So that's the overall number that is playing out in this domain of 40,000, 50,000 crores. Now, as far as the second part was concerned around, how does it play out in terms of rate per se? Am I correct?

That's what your second question was? Yeah. And I think so two things are very important when the GM for rate rationalisation has been there for quite some time.

So I'm sure Prime Minister, while making this statement, which is a very bold statement, a lot of work has happened in the background. Because this rate rationalisation committee headed by coincidentally, the CM of Bihar, Mr. Samrat Chaudhary has been working and there have been a lot of industry discussions as well, which we understand have happened. So our assessment is a lot of work would have happened.

Of course, they must have been guidance from PMO etc, in terms of what they would want to do achieved by Diwali, but states must have been, you know, brought aligned or on the same page while making this announcement and hence the confidence of making such a bold move within a one and a half months. Honestly speaking, without that, and states consensus, it would be very difficult to make these things happen in two GST council meetings. Our assessment is, because this rate rationalisation committee has been there for more than a year now, a lot of meetings have happened.

That is what is giving the sympathies and confidence to the government, that they should be in a position to make good this promise of rationalising the stats.

Right, and I'm going to come to the unfinished agenda in a moment. But Prashant, if I can continue with you. So all of this is also happening in another context where we are fighting a tariff battle.

I don't know if we are fighting it, fighting it, but we are up against very high import tariffs from the US, 25% in force, 25% potentially, if we are not able to work out the Russian oil import situation. Plus, now more tariffs threatened by US Treasury Secretary Scott Besant just over the weekend, in case he doesn't comply. Plus, he wants the European Union also to tariff us for buying Russian oil.

So that's the backdrop to this. My question is now a little part conceptual part practical. If as we ease up or make simple these internal procedures, including, let's say reduction of tax, does this help us in any way or what ways, as we try and become more competitive globally and as we try and manage these external battles as well?

Prashanth Agarwal

So I'll take the first shot. So I think, interestingly, Prime Minister again and again made a statement around Aakman Edward Bharat. So I think the focus is internal as well.

So there is a battle that they are fighting with US etc on the tariff side. And there is only as much that India can do on that front, given the political mileage, etc, that may come out of it, per se, along with economical benefits that India would want to carry. Our assessment is there would be a midway found even there, hopefully, and that's how the timelines have been brought in.

In fact, there was just a news report flashing just before this, you know, video as well, wherein they were saying that Trump has said that they will want to, you know, at least pause the additional tariffs in case of Russian oil being bought post the Alaska meeting. So not sure how this pans out. But I, our assessment is that yes, internal economy benefit or boost is extremely important to in a way the incenses against any of the tariff impact, the tariff impact, if it remains as it is, the economists believe could be anywhere between 4.4 to 0.5% of the GDP. So you really need to provide those impetus to the GDP. And, you know, rate cut was caused because of this whole tariff uncertainties as well. We don't know what will happen in the next cycle of the rate cut, perhaps, as RBI has been very aggressive about it, that may also come in.

So idea is the government seems to be very clear, put money in the consumption hand, bring in more impetus to the industry to invest. With all of this being put in place, I think the economy should be able to still sail through if, if the tariffs do not go the way we want them to.

Rohit, same question. So can we, are we better empowered or equipped for our external battles with this internal reform that we've been talking about so far?

Rohit Jain

Absolutely. I think that's very, very important that as Prashant was saying, if we improve our internal consumption story 1.4 billion people to service and if we really improve that consumption story, we will not have that much of export dependability for our growth of an economy. Another important thing is a reduced import dependability as well, because today, gradually imports have, it's been going down.

And if we can achieve import, lesser import, good consumption within the domestic era and continues to export, because I also want to bring to a notice the treaty that we have been signing. We already signed the FTAs on the verge of negotiating EU. And if that be the case, you can imagine how many today, if I was counting, we are almost 50 countries where we have some trade agreements, which is not a small one itself.

It is not only that we are dependent on US as such alone. We have 50 treaty partners, where India has trade agreements. And now we are signing with the EU people as well.

So we can't take off from our export. Export of goods is there. Export of services is always a story that we really talk about.

IT is a main core offering as far as India is concerned. That has not been impacted by any tariff issues at all. So export of goods to our treaty partner countries, export of services to globally, including US, increase in the domestic consumption, lesser import dependability on Atma Nirbhar Bharat and Make in India scheme will give us a desired economic growth.

Okay, last couple of questions. And let me start with you, Rohit first, and then I'll come to Prashant. What's the unfinished agenda now?

So assuming, let's say, I mean, we've still got a month and a half, but assuming, let's say, we are able to rationalise these rates to two new rates, which will obviously increase consumption, simplify things, and that will in turn give us some sort of internal fortification against other battles that we're fighting externally. So that's all the good news. But what's the other side?

Rohit Jain

We have to still see the final details post the GST Council meeting. What is getting covered? What we have today, only the high level pillars of the reforms.

Having said that, we don't see three important aspects which is getting addressed. The primary focus was on the rate, but beyond rate, there are some structural issues that require an address, particularly in the context of intra-company activities. That has created a huge litigation, be it brand, be it corporate guarantee, be it in terms of use of inter-branch ISD mechanism, had created a lot of disputes.

So those we don't find any reference of any of those intra-company transactions, how they are going to be tackled. That's the main thing. Second, we also don't see any dispute resolution mechanism.

AR has been a failure under the GST law. How are they going to really tackle this in terms of revised AR? Formation of a tribunal benches we see getting operational.

That's a sad part. Even after eight years of implementation, we don't have tribunals being formed and being operational. That's the really sad part indeed.

We have to address the dispute mechanism in a much better way. And that is something, is the second thing, which is I still believe unfinished in terms of approach. And third, I think this is slightly, you know, I would hesitate to say, but the mindset of the revenue officer.

How are they going to change? Because today, if the revenue collector's job is to collect revenue, we have changed our names from collector to the commissioners, but their job is still acting like a collector. We have to somehow bring that confidence in the taxpayer.

And that can only happen to the revenue officers' mindset being changed. They cannot be put the gun on the shoulders of the SAC and recover the tax, including in the course of investigation and so on and so forth. There has to be some stricter guidelines in terms of how the procedurally all of this will be implemented.

And we may have a right intention. We may have a right law, but if we fail on implementation, the overall positivity that we really want to achieve will not get through. So I will believe that these three things are extremely critical.

There are some intra-company, some core structural changes are still unfinished. Dispute resolution mechanism still needs to be addressed in a more better way. And third, how are we going to make the implementation smoother without getting into the mindset?

Now, I'll just give you one example and conclude that any rate rationalisation, we had a mechanism of anti-profit hearing. You would see the demands which have been raised under anti-profit hearing today has been huge. The mechanism adopted by DGAP to NAA has been very, very sad.

Now, if you look at it, now this rate rationalisation from 12 to 5, 28 to 18, the anti-profit hearing, you can imagine how many notices will be issued. If there is no proper guidance issued by the regulator, by the policy makers, we will again see the surge of disputes. And that's the reason I mean, implementation needs to be smooth in this sort of matter.

Got it. Thanks Rohit. Prashant, last word. What's the unfinished agenda in your view?

Prashanth Agarwal

Yeah, I think I'll just take a step back and see how we have gone out on GST. And it's been more reactive to be honest, whatever even today we are talking about, we knew it should happen and it is reactive. Having said so, what is missing according to me is beyond what Rohit has already very well elaborated is the GST credit part. I think I would have wished to see a lot more clarity around GST credit because that is another area of litigation.

You have to cut down on the litigations, see how best you can ensure that there is certainty in the business and there is no cost as we wanted cascading cost in the business under GST. So credits would be something that I would really love to see how it happens. They have talked about registration and returns for small tax payers. Trust me, 97% of your revenue comes from the large tax payers.

What is there for them? We see struggle for them even today, although best of the technologies have been implemented both in terms of registration and return compliances. How can that be eased out would be extremely important.

And I think government has a focus on that as well. And futuristically, I would want to see how the whole data which we currently have as government can be used better from an industry standpoint. I think going beyond GST has given us a lot of opportunity.

If today I know from where I source my raw material, where my consumption story stands, how can this be beneficial to the economy at a larger scale is something which I would love to see from a data standpoint. And the government has to democratise this data to ensure and enable the industries. So how that can be done would be really, really great to see, according to me.

Prashant and Rohit, thank you. So Prashant, you started out by wishing us or and everyone a happy Janmashtami. And we've also talked about the deadline of Diwali, which is barely two months away or less than that.

So whatever it is, this is a sprint and not a marathon to achieve those lower rates so that people are able to enjoy their Diwali, buy things at lower prices and have a happy festival of light. So on that note, thank you both for joining me.