GST Revenue Leakages Led to Modi’s Tax-Slab Simplification

Hyderabad: India’s multi-tier GST was meant to be a landmark in tax transparency. Instead, years of ambiguous rate schedules and frequent slab changes have provided opportunistic businesses with loopholes for evasion.

This is costing the national exchequer thousands of crores annually. The I-Day announcement by Prime Minister Narendra Modi to simplify the tax slabs and ambiguous rate schedules effective from the Diwali this year is seen as a corrective step.

Sectors like accommodation, textiles and packaged food have exploited the fine print or manipulated product and process classifications to pay lower taxes. Hotels manipulate room rates and ‘reporting’ dates to reduce GST on restaurant services.

Rice traders dodge taxes by tweaking branding or bag weights. Misclassification in textile processing—claiming transformative services as ‘job work’—lets manufacturers pay only 5 per cent instead of the mandated 18 per cent. The confusion extends to credit notes, where double input tax credit claims result in government losses.

This tangled web of rules and ambiguous definitions have become a "gift for tax dodgers."

Taxation experts quote a recent policy report to say, “Multiple rates and unclear definitions create room for revenue leakage and litigation.” Responding to mounting pressure, the central government is preparing to scrap the multi-slab system for a two-rate regime — 5 per cent for essentials and 18 per cent for everything else.

The reform promises to close loopholes, reduce disputes and streamline compliance, officials claim.

An Assistant GST Commissioner told Deccan Chronicle that the new system would reduce tax evasion, boost government revenue and make GST both fair and future-ready. Over 90 per cent of items fall under the proposed simplified 5 per cent slab, and the rest in the 18 per cent slab, as against the current multiple slab rates.

The changed system would hopefully put an end to the ambiguity in tax schedules, which so far affected a few sectors based on the service.

Ravi Kumar, a tax consultant from Hyderabad, said many items like mobile phones and air conditioners, once considered luxury goods, have become essential and are now widely used by the middle and lower classes. “There is no purpose in imposing higher slabs on such goods, as traders and consumers find smart ways to ‘zero’ the tax. No one would hesitate to pay tax if these goods were brought under lower slabs.”

The real estate and construction sectors would also benefit since cement and steel currently attract higher tax slabs, he felt.

Another tax consultant, Polishetty Laxman, shared similar views, saying the simplification of tax slabs and removal of ambiguity in tax schedules would drastically cut down zero-rated sales and help increase revenue by bringing more transparency to the system.

As India gears up for this new shift, businesses, taxpayers and policymakers hope that would ensure clarity—and stronger tax collections.