Elucidating the Reasons Behind the Indian Government's Decision to Fix the Maximum GST Rate at 28%

India's Goods and Services Tax (GST) is a significant overhaul in the indirect tax system, aimed at unifying and simplifying tax administration. Since its conceptualization in the year 2000 by the Vajpayee government, and its official implementation in 2017, one of the most debated aspects of GST has been the maximum rate, currently fixed at 28%. This rate has been applied to certain luxury and sin items, while a more lenient 18% rate is applied to the majority of goods and services.

Rationale Behind the Maximum GST Rate of 28%

The tax rates in GST have been decided based upon the indirect taxes that existed in the old regime. A clear majority of goods under the 28% bracket were subject to excise duties in the previous system. After considering all the taxes levied on respective goods, the effective rate in the old system closely mirrors the GST rate, thus maintaining a certain level of consistency and continuity.

Moreover, the tax rates of different countries cannot be directly compared due to variations in economic structures. This is why the 28% rate for luxury goods in India is strikingly similar to other countries' corresponding rates. However, only a very select range of goods and services have been included in the higher tax slab. Instances of goods put under the 28% slab include luxurious services such as hotel stays (tariff greater than or equal to 7500), as well as premium items like perfumes, fireworks, and granite.

Historical Context and Implementation of GST

It has been 17 years since the idea of GST was first conceptualized in India. In 2000, during the Vajpayee government, an empowered committee led by Asim Dasgupta (then Finance Minister of West Bengal) was tasked with setting up the framework for GST. This marked the beginning of a protracted process involving state-level consultations and debates.

Approximately 160 countries across the globe have adopted GST, with France being the first to introduce it in 1954. As of now, around 160 countries have implemented some form of GST or Value Added Tax (VAT).

India, as a federal state, is unique in its dual-GST structure, comprising Central GST and State GST. This is the only country in the world, apart from Canada, with a dual GST system. The dual structure is designed to streamline tax collection and administration at both the central and state levels, ensuring a more efficient tax system.

Proposed GST Rate Structure in India

The GST Council in India has laid out a four-tier rate structure. It includes two standard rates: 12% and 18%. There is also a lower rate of 5% for essential goods and a higher rate of 28% for luxury goods and sin goods. The government may impose an additional cess on certain sin goods, such as tobacco or alcoholic beverages, over the 28% rate. This cess serves dual purposes: to discourage consumption of sin goods and to generate additional revenue for the states.

Considering the ITC benefits (Input Tax Credit) available now, the effective tax has indeed been reduced for most goods and services in comparison to the previous regime. This has helped to reduce the burden on businesses and consumers alike, promoting a more equitable tax system.

Conclusion

India's decision to fix the maximum GST rate at 28% has been influenced by careful consideration of the broader tax landscape, the needs of the economy, and the established tax structure. This approach ensures that while certain luxury and sin items are taxed at a higher rate, the majority of goods and services benefit from a more lenient tax regime. The implementation of GST has proven to be a transformative step in simplifying and unifying India's tax system, reflecting both historical tax policies and contemporary economic realities.