As the Goods and Services Tax (GST) completes eight years since its rollout, former Revenue Secretary Tarun Bajaj says the tax regime has achieved broad acceptance, but critical challenges around rate rationalisation, input tax credit (ITC) blocks and the future of compensation cess remain unresolved.
“Ideally, we should reduce four slabs—5%, 12%, 18%, 28%—to three. Say, 5%, 12%/18%, and 28%, or some other configuration,” Bajaj told CNBC-TV18, while cautioning that any attempt to rework slabs would be politically and fiscally complex.
“If you retain 5% and 18%, the gap is too wide, and pressure will build to shift items to 5%. But if you shift too many to 5%, input tax credit (ITC) gets blocked. That causes cascading.”
He warned that inverted duty structures—such as in textiles and apparel—could worsen with any attempt to reduce rates arbitrarily. “If you move them from 12% to 5%, the problem gets worse,” he said, adding that these choices would require strong negotiations between the Centre and the states.
“Those moving to lower tax rates will be happy, but those moving up will raise a ruckus. And the political executive has to manage that noise.”
Consensus, not coercion
Bajaj emphasised that the GST Council cannot push through such changes unilaterally. “Even if two states strongly oppose something, you have to convince them. You can’t bulldoze decisions… That’s how the Council has worked—with time and consensus, and the backing of industry associations like FICCI and CII.”
He said the 5% slab should continue, and merging 12% and 18% into something like 15% or 16% could be a reasonable compromise, but any move would need revenue neutrality to be worked out carefully.
Faith in GST, no longer questioned
Reflecting on the journey since 2017, Bajaj said, “There were hiccups initially—states, industry, everyone was questioning whether GST was the right step… That faith has now been restored. Everyone, including states and industry, feels satisfied.”
He also acknowledged how far the system has come technologically. “Technology has improved significantly. Initially, there were several problems, but now it has stabilised… It helps both the department and taxpayers—making compliance and return filing easier, and enabling the department to use AI analytics to identify fraud or tax evasion.”
The future of compensation cess
On the fate of the compensation cess, which is due to end by March 2026, Bajaj said the matter remains complicated. “It’s very difficult to do crystal gazing on this issue… The cess revenue should be close to ₹1.2–1.4 lakh crore a year,” he said. Currently, the cess is being used to repay loans taken during the pandemic, with neither the Centre nor states receiving funds.
According to Bajaj, if the cess is eventually merged with the GST rate base, there’s scope to revisit high-taxed items. “For example, even the smallest car—with a 1200cc engine and less than four metres in length—has a cess, albeit only 1%.” He added that items like cement may warrant rate cuts if offset by higher cess collections.
However, sharing this revenue with states and using part of it to unlock reforms—especially around ITC and high slabs—could make the transition towards a more simplified GST framework viable.
“We should eventually reduce the slabs to three,” Bajaj said, “and maybe, as our per capita income rises, reduce it further to two in the future.”
