GST: Once branded Gabbar Singh Tax, it turns out to be Good and Simple Tax

In 2017, nearly four months after the Goods and Services Tax came into effect, Rahul Gandhi, the Congress vice-president, criticised the GST, calling it BJP’s Gabbar Singh Tax. Addressing a rally in Gandhinagar, Gujarat, Gandhi said, “The government ignored all our suggestions on GST and introduced it with celebrations at midnight. In their GST, there is the highest 28% tax and three return forms that make the GST Gabbar Singh Tax.”

The Modi government's flagship fiscal project became a punching bag for opposition and critics. Rahul's dubbing of GST as Gabbar Singh Tax was derived from his comparison of the government allegedly looting the poor of their hard-earned money with the help of this tax, much like Bollywood villain Gabbar Singh who extorted money from helpless villagers in the movie 'Sholay'.

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However, political rhetoric apart, GST has been hailed as one of the most radical reforms in India till date which eased compliance for business, despite initial hiccups and with continuing revisions, as well as brought down tax burden on common people. The weighted average GST rate fell from 14.4% at GST’s inception to 11.6% by September 2019, and is projected to decline further to 9.5% under GST 2.0, as per an SBI Research report.

The primary goal of the GST when it was introduced was to integrate a highly fragmented indirect tax regime and form a common market. The GST 2.0, ushered in with the rationalisation announced by the GST Council yesterday, is to make the tax simpler and better for businesses and industry as well as common people.

Why it took so long to reduce GST slabs

Though the GST 2.0 can shield India from the impact of Trump tariffs, many mistakenly believe that the GST rationalisation was forced by tariffs. Finance Minister Nirmala Sitharaman clarified yesterday: “The tariff turmoil is not a matter that influenced the GST reform. Because we've been at it now for more than one and a half years. Some group of ministers was working on rate rationalisation. Some other group of ministers, a bit later, was working on insurance and so on. And compensation cess was a reality, that it is going to end the moment you pay back the loan. None of this has anything to do with the tariffs.” Apparently, the government aimed to reduce the number of slabs several years ago and the GST 2.0 was in the works since the impact of the pandemic had tapered off. But why did the GST not have fewer slabs to begin with?

The government took several years to reduce the number of GST slabs due to a combination of economic and administrative factors. GST was a major tax reform, and when it was implemented in July 2017, there was significant uncertainty about how it would impact government revenues. Multiple slabs (5%, 12%, 18%, and 28%) were designed to balance affordability for consumers and revenue needs of the government. The government wanted to ensure that tax collections remained stable before moving to a simpler, fewer-slab system.

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GST is governed by the GST Council, which includes representatives from both the Central and State governments. States were concerned about revenue loss and were guaranteed compensation for five years. Any major change such as slab reduction in the beginning required broad consensus, which was not always easy due to diverse economic interests across states.

Implementation challenges have dogged GST right from the beginning. GST rollout had faced several technical and compliance issues, especially for small businesses adjusting to digital filings and invoice matching. The priority for the first few years was stabilising the system, rather than overhauling tax slabs.

Frequent rate changes could lead to confusion and compliance issues. The pandemic, which struck in 2020, severely affected revenues and economic activity.

During the pandemic, GST collections fell sharply due to lockdowns and reduced economic activity. States as well as the Centre incurred huge healthcare and welfare costs. The GST compensation to states was also a fiscal challenge. Cutting tax rates further at that time could have worsened the fiscal deficit. Moreover, there was no guarantee how soon and how much the transmission of the new GST slab system would take. The pass-through of GST rate cuts to consumers could be uneven as businesses which had suffered a big blow due to the pandemic, may not have reduced prices proportionally to retain the margin. Therefore, there was no guarantee of direct consumption boost while fiscal costs would be certain and immediate .

However, this doesn't mean GST did not see any changes at all since it was launched in 2017. Over time, rates were tweaked. Many goods were moved out of the 28% slab, and inverted duty structures were addressed. But a full merger of slabs required careful planning.

Why GST 2.0 now?

The government had been working on GST 2.0 for the past one-and-a-half years, as Sitharaman said, which means the government set out to rationalise GST when concerns over a post-COVID fragile recovery being hit by a major GST restructuring must have been abated. Slab rationalization is not just just about rate cuts but merging or reshuffling of slabs which can have diverse sector-specific impacts.

Post-COVID, GST revenue has stabilised and collections have grown consistently. Stronger compliance, better tech and fewer evasion loopholes have made the system more robust. This gives the government fiscal room to consider slab rationalisation without fear of major revenue loss.

When GST was launched in 2017, it was a massive structural shift. It took time to onboard millions of small businesses, fix tech glitches such as on the GSTN portal and streamline return filing and refund mechanisms. Now, with years of data and experience, the system is better positioned for major structural changes such as slab rationalisation. In the beginning the focus was on survival and stability and now it has shifted to efficiency and reform.

What was once branded as the Gabbar Singh Tax has turned out in due course to be a Good and Simple Tax with latest restructuring promising not only smoother compliance and more efficiency for businesses and government but also significant benefits for common people.