How to Mitigate Revenue Uncertainty Related to Restructuring the GST Rate Structure?

Simplifying the GST rate structure by consolidating rates into two to three is desirable. Multiple rates may help make the Indian GST progressive, but they also open up scope for misclassification of commodities and associated revenue leakages. Moreover, various GST rates and frequent changes in the tax schedules increase the tax compliance costs. GST rate-wise taxable values and tax liabilities differ across States and largely depend on households' consumption patterns. Therefore, rate rationalisation in the GST may have state-specific revenue impacts. In the absence of revenue protection after the GST transition period, the question is how the revenues of states can be protected. Setting tax rates for heterogeneous commodities (serving different consumer groups with varying income levels) is challenging in developing countries. Therefore, policymakers often face the dilemma of whether to tax or exempt a commodity. Exemptions of commodities shrink the tax base, increasing the tax burden on taxable commodities. The high presence of the informal sector (in supply chains) typically makes tax enforcement challenging. This paper highlights the challenges the GST Council may encounter before rate rationalisation and offers possible options for mitigating the revenue impacts.