[Answered] Critically analyze how the proposed GST reforms, by prioritising long-term growth over short-term revenue, can serve as a model for fiscal policy and good governance in India.

Introduction

India’s GST, introduced in 2017, subsumed 17 taxes and 23 cesses into one indirect tax regime. GST 2.0’s rationalised slabs and compliance reforms emphasise structural growth, embodying fiscal prudence and good governance principles.

1. GST 2.0: A Long-Term Structural Reform: Rationalisation of slabs from four (5%, 12%, 18%, 28%) to two (5% and 18%) with special rates for essentials and luxury items reduces tax inefficiencies and simplifies compliance. Institutional strengthening through the Goods and Services Tax Appellate Tribunal (GSTAT) provides legal certainty, reinforcing the rule of law.
2. Prioritising Growth Over Immediate Revenue: Revenue may dip initially (₹20.2 lakh crore to ₹19.7 lakh crore, FY24), but by the Laffer Curve logic, lower rates incentivise compliance and expand the tax base. OECD and IMF studies highlight that tax simplification initially reduces collections but later accelerates growth through higher compliance and consumption.

Model for Fiscal Policy

1. Counter-cyclicality: Lower taxes in the short run act as a fiscal stimulus by boosting demand.
2. Equity through progressive taxation: Sin goods (soft drinks, tobacco, gaming) attract 40% tax, aligning with public health objectives while ensuring revenue buoyancy.
3. Formalisation of economy: Simplified registration for small businesses and streamlined refunds for exporters reduce entry barriers, enhancing India’s tax effort beyond the historic 70% potential collection mark.

Good Governance Dimensions

1. Transparency & Simplicity: Rationalised slabs improve predictability for businesses, reducing tax litigation and enhancing the Ease of Doing Business.
2. Inclusivity: Exemption for 52 essential goods reduces regressive impact on low-income households, aligning taxation with social justice.
3. Accountability: Removal of cess on coal while raising rates enhances the fiscal health of DISCOMs, reflecting cooperative federalism through GST Council deliberations.
4. Digital Governance: GST 2.0’s focus on faster refunds and compliance through technology deepens e-governance practices.

Challenges and Critical Perspectives

1. Short-term fiscal stress: Anticipated fall in collections may widen fiscal deficit (currently ~5.6% of GDP).
2. Implementation risks: As seen in Malaysia (2015–18 GST rollback), poor execution can undermine trust.
3. Inverted duty structure persists in some sectors, causing liquidity crunch for firms.
4. State autonomy concerns: Higher central control over taxation may revive debates on fiscal federalism.

Way Forward

1. Ensure robust training for tax officials and communication with businesses to avoid transitional disruptions.
2. Incorporate periodic review mechanisms within GST Council for flexibility.
3. Link GST reform outcomes with broader fiscal targets under the FRBM Act to strengthen credibility.

Conclusion

As Amartya Sen notes in Development as Freedom, inclusive governance requires structural reforms. GST 2.0 exemplifies fiscal prudence—balancing efficiency, equity, and growth—making it a model of sustainable economic governance.