GST 2.0 Should Cap Peak Rate At 18%, Pave Way For Nationwide Single Tax Slab: Think-Tank

Under the planned goods and services tax reforms, the peak tax slab should be 18%, and not 40%, even for luxury and sin goods, said Think Change Forum in its report titled 'GST 2.0: Two Slabs Today, One Rate Tomorrow'.

"Creating a 40% slab, even for a narrow set of sin or luxury goods, will set a precedent for creeping expansion. Over time, more items will be drawn into this category, undermining the very purpose of simplification," the report stated.

GST 2.0 should phase out the 12% and 28% tax slabs, while only retaining 5% and 18% includes cesses, it said. This step will help in eliminating anomalies such as inverted duty structures, cut down grey and illegal markets, reduce litigation and compliance burdens, and restore credibility to the GST system, it said.

"GST 2.0 must not repeat the mistakes of the past by creating more slabs or raising the peak rate. The real reform lies in simplification — two slabs today, and eventually one rate tomorrow. That is the path to higher compliance, fewer distortions, and sustainable revenue growth," Nilanjan Banik, Professor at Mahindra University and author of the report stated.

The report comes in the backdrop of the GST council set to meet on September 3-4 to deliberate over moving to a two-slab taxation of 5% and 18%.

The council, consisting of finance ministers of all states and union territories besides the Centre, will consider the recommendations given by the three group of ministers on rate rationalisation, compensation cess and health and life insurance.

The report pinpointed on the need to avoid backdoor revenue devices and stated that measures like taxing on maximum retail price instead of transaction value, or exempting sectors such as insurance from GST without preserving input tax credit, distort GST’s design and pile hidden costs.

The think-tank also highlighted moderation of taxes as a growth strategy in lieu of it being a 'revenue sacrifice'. By reducing distortions, India can drive higher consumption, expand compliance, and over time generate massive tax collections to fuel its ambition of becoming a developed economy, it said.

The report proposed a 'Cess Rulebook' with guardrails on when and how cesses can be levied, indexed, or sunset, as a pitch for transparency with regard to additional cesses and surcharges on luxury and demerit goods.

The purpose should be a transparent, predictable tax system that keeps the peak rate at 18% and gradually converges to a single rate, Think Change Forum Secretary General Ranganath T said, speaking at the launch and added that, only then will GST truly become 'One Nation, One Tax' and move beyond symbolism.