Is GST becoming what it sought to destroy?

By Audarya Gupta

New Delhi, India

Caramel Popcorn, Credits : Flickr

When the Goods and Service Tax was brought up in 2017, the intention behind it was quite noble: Replacing a tangled web of state and central taxes, GST promised to reduce over-regulation, eliminate cascading taxation, and make compliance easier for businesses. It had reduced around 15 central and state taxes like Countervailing Duty (CVD), Special Additional Duty of Customs (SAD), Octroi and Entry Tax. However, in recent years, the very tax system designed to simplify has itself become a labyrinth of rules, defeating its original purpose.

An example of this was seen when a restaurant owner from Gujarat confronted  the Finance Minister, Nirmala Sitharaman over the multiple GST slabs applied. His frustration was justified: food served in air-conditioned restaurants is taxed at 18%, while non-AC restaurants face a 5% GST without input tax credit. Why should the presence of an air conditioner change how much tax a customer pays on the same meal? This incident sparked discussions across business circles, highlighting how the original goal of GST—to create a uniform tax structure—was slowly being eroded by excessive categorisation.

Indian Finance Minister, Nirmala Sitharaman, Credits : Flickr

Another instance that shows the inconsistencies of current GST rules is the caramel popcorn tax debate. In a rather confounding classification, caramel popcorn is taxed at 18%, while regular salted/ buttered popcorn falls under a 5% tax slab. The justification? Authorities determine that caramelisation processes transform the item into a confectionery(sweet) so the rates need to be increased. The distinctions between product categories that authorities use fail to recognise the original principle of GST which was designed to simplify taxations while experts argue these divisions are artificial. A small change to a product can lead to different tax levels regarding its classification according to government authorities. These kinds of disputes have also taken place regarding flavour milk and plain milk distinction as well as paratha-roti comparisons and papad-fryum struggles which resulted in extended legal conflicts and conflicting court decisions. The various tax rates create problems for business compliance as well as consumer confusion about their taxes. The eight-year journey of GST has transformed an anticipated unified tax simplification into an urgent need for classification reform of its complex system.

Regulations which grow beyond control promote corruption by creating additional points of bureaucracy that force companies and people to use multiple procedures to meet complex standards. Complex regulations cause citizens to search for workarounds which manifests as bribery together with favouritism and illegal manipulations of legal loopholes. Public officials who possess enforcement discretion may take advantage of regulatory uncertainty to request illegal payments if they provide faster clearance or unique exemptions. Efficient and transparent regulatory rules help lower corruption rates while encouraging economic expansion through easy and fair compliance procedures. This subject should be addressed during the upcoming few years.