What is kitsch as Kundera uses the term in The Unbearable Lightness of Being? I thought it refers to inferior imitation art, but Kundera seems to use it differently?
Concerning "kitsch" in Kundera's The Unbearable Lightness of Being, you are correct that it is, literally, inferior art. It may be inferior for different reasons, two of which are sentimentality and vulgarity.
A third is more specific to the novel. Kitsch in the novel is inferior because it is propaganda. The art of "social realism," as it is called, is the literal kitsch of the novel. It's sole purpose is to promote the totalitarian state. It is propaganda, not art. Art should reveal elements of human existence and reveal the complexity of existence--it should raise questions. The art of social realism claims to have all the answers.
Figuratively, though, Kundera uses the term, kitsch, metaphorically to mean that which the totalitarian state does to control its people. Any regime such as the communist one in the novel seeks complete agreement on all matters that relate to the power and authority of the state. The state uses such events as the May Day celebrations to maintain control over its people. The state is involved in reductionism. It simplistically reduces issues, events, whatever, to a specific interpretation that it sanctions.
Kundera writes that the totalitarian state is devoid of irony. The state takes itself very seriously: It cannot admit a difference between appearance and reality or that something didn't turn out the way it was supposed to. Kitsch is the low quality propoganda that takes many forms and is used to maintain control of the people.